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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
The Global Marketplace and a Regulatory Overview


Roel C. Campos

U.S. Securities and Exchange Commission

Amsterdam, Netherlands
September 17, 2004

I'd like to thank the Mentor Group for inviting me to join the meeting this year. I have enjoyed the meetings thus far, and look forward to the remaining sessions.

It will come as no surprise to you that I too am going to speak about globalization and the regulatory spectrum that has national recognition on one extreme and harmonization on the other. Of course, our respective views on particular items may differ. If all of us gathered here today agreed on the proper approaches to the various regulatory questions before us, we could pack up now and go see the sites. Amsterdam is a lovely city. The point I'd like to make today, though, is that as the SEC and securities regulators around the world consider new regulations, we frequently find that we share similar concerns even as we adopt different mechanisms to address these concerns. Nonetheless, our different regulations and decisions reflect not only different approaches to similar problems, but also deliberate policy choices. Thus, it is through open and continuous dialogues that we are able to identify like endpoints and move up and down the procedural spectrum as necessary to create better choices for investors.

Before I go any further, I must clarify that the views I express today are my own and do not reflect the views of the SEC, its staff or the other Commissioners. The staff has come to know that I speak my mind and I often have different views than they do. I would like to think that the staff sometimes comes around to my way of thinking. My comments certainly do not signal future policy decisions by the Commission.

Much ink has been spilled over the last few years with respect to the globalization of the world's securities markets. An entire language has been developed to analyze the preeminent regulatory approach to this recent phenomenon. The current lingo includes the terms "national recognition," "equivalence," "convergence" and, finally, "harmonization." Significantly, it isn't the global form of the markets that is novel; it is the regulation of that global marketplace that produces the difficulties.

In fact I would like to spend a moment on the notion of a global marketplace and the fact that we've come full circle (no pun intended!). In doing so, I'm going to borrow from recent Commission testimony by our Director of International Affairs which details this history quite succinctly.

I. A Historical Perspective of Global Marketplace

As you know, "Stock markets have existed in the United States and in Europe for centuries, and American and European investors, issuers, and markets have a relationship going back throughout most of this time. Much of the capital that traded on the London, Amsterdam, Paris, New York and Philadelphia stock exchanges over the years came from foreign investors. As an example, during the second half of the nineteenth century, British and other European investors provided much of the capital needed to construct the early American railroad system - to such an extent that populists of that era occasionally complained that the British were trying to "recolonize" America through direct investments. And, of course, the shape of the United States today owes something to the Mississippi Company, a French joint-stock company founded by a Scot and drawing on investors from England, France, Genoa, Germany, and Venice.

Yet, throughout most of this period, the regulation of securities markets varied considerably. English law prohibited unchartered "stock-jobbing" after the South Sea Bubble financial crash in 1720. From the mid-nineteenth century on, various English Company Acts imposed national-level requirements on how shares in corporations could be marketed to the public and what information about these corporations had to be disclosed to potential investors. By contrast, throughout most of the existence of Wall Street, "securities regulation" in the United States was a combination of exchange self-regulation, common law, state corporation laws and, starting with Kansas in 1911, state "blue sky" statutes.

Despite the long history of stock markets, the United States was the first country to adopt a comprehensive national approach to securities market regulation with passage of the Securities Act of 1933 (1933 Act) and the Securities Exchange Act of 1934 (1934 Act). These two statutes (along with the Public Utility Holding Company Act of 1935 and the Investment Advisers and Investment Company Acts of 1940) were passed the same time that the "international" dimension to our stock markets decreased dramatically, largely due to the Great Depression and the aftermath of the Second World War. While several other countries in the immediate post-War period followed the American example in creating their own national securities laws and in setting up their own securities markets, until relatively recently and with a few exceptions, the world's securities markets catered largely to domestic issuers. In 1986, for example, only 59 foreign issuers were listed on the New York Stock Exchange, compared with the 470 listed today. While the securities markets of a handful of countries were more "international," there was little regulatory overlap - at least from our perspective. In other words, for much of the SEC's existence, with some minor exceptions, regulation of our stock markets was mostly a local affair."

II. Recent Development of Cross Border Transactions

This situation is now changing. Almost all developed market jurisdictions - and even a considerable number of developing markets - have adopted forms of securities market regulation similar to the U.S. At the same time, capital markets are reverting to their earlier, more "global" form. For example, during the 1990s announced cross-border acquisitions involving U.S. companies increased more than four-fold - from approximately 500 in 1990 to approximately 2400 in 1999. During that same decade, the total dollar amount of cross-border securities holdings where non-U.S. investors held U.S. securities, or vice versa, grew from approximately $1.5 trillion to approximately $6.9 trillion. Currently, there are approximately 1250 non-U.S. companies registered and reporting with the SEC. That is an increase from fewer than 400 at the beginning of the 1990s.

The result is something unique in capital market history - a truly global capital market, such as we have had in the past, but operating in a world of extensive domestic capital market regulation. Therein lays the complexity. The size of the U.S. market means that rather than setting securities regulations in a vacuum, the agendas of Congress and the SEC have a worldwide impact. Like peeling an onion, extra-jurisdictional implications on the part of the U.S. are only the first layer.

Recent initiatives by the European Union promise to create an EU-wide capital market and a rationalized, coordinated European securities regulatory structure. These initiatives will improve the efficiency, liquidity and investor protection aspects of Europe's securities markets - developments that will benefit both US investors and issuers in the long run, by providing the former with greater investment opportunities and benefiting issuers by possibly lowering their cost of capital. This creation of a coordinated European securities regulatory structure raises the possibility of real conflicts between regulatory requirements stemming from this side of the Atlantic - the second layer of the onion.

The potential conflicts between the regulatory requirements of the U.S. and E.U. markets can have an adverse impact on the cross-border flow of capital. Some of these conflicts may prove difficult to avoid, stemming from differences in regulatory philosophy. In fact, one of the greatest challenges that the SEC has faced in implementing legislation during my time at the Commission - the last two years - is to fulfill our congressional mandate, while also respecting foreign laws and regulatory schemes. Although some may disagree, I believe that we have worked hard to strike this balance, and I will speak more about this later as I discuss certain regulatory developments from the last decade

III. Regulatory Approaches for Cross Border Business

At this time, however, I would like to turn to a discussion of those terms I mentioned earlier: national recognition (also known as "mutual recognition"), equivalence, convergence, and harmonization. There is no question in my mind that the SEC and European regulators share the same concerns for investor protection, financial stability, and free and fair competition. The question is how do we get there?

National recognition, which is often coupled with the term cooperation, is at one end of the spectrum for approaching disparate regulation across borders. The SEC has interpreted national recognition to mean that an issuer, exchange or other market participant that was regulated in their home country, regardless of the quality of the home country standards, would not be subject to the regulation of the second country. The second country could not add additional regulatory requirements and would depend solely on the home country's regulation.

Equivalence appears to be a step above national recognition. It implies differences in regulation, which are possibly significant, but potentially are guided by the same goal. The Europeans seem to favor this term, and I hope I will not misconstrued their use of it. I am certain that you will correct me if I do!

Moving along, we come to convergence. There has been much discussion on how to define convergence. I, myself, have struggled with the concept. I believe that convergence is the movement of two or more sets of standards toward each other at a relatively high level, producing identical or nearly identical principles of regulatory purpose. To get to this end, it seems necessary that convergence efforts should begin with new issues in securities regulation that have not been previously dealt with in home countries, where it will be relatively easy to work together and to develop common approaches. There also is a role for partial convergence as far as facilitating cross-border business. Finally, on the opposite end of the spectrum from national recognition is harmonization. Harmonization is simply the Utopian extreme of convergence.

I do not believe that any one of these regulatory approaches can be applied unilaterally to the broad range of regulatory issues facing the markets. One approach may be more appropriate for a particular issue, which is why it is crucial that we maintain an open dialogue as we move forward. Communication is key to understanding the motivation behind a nation's regulatory design. As regulators, we do not always hold all of the authority required for creating the cross-border facilitation that we may desire. Our respective countries have sovereign and political objectives that may influence the direction we can take. That being said, the changes in the business and political climates, the increase in global competition, the development of more market-based economies, and rapid technological improvements all suggest to me that convergence is the regulatory approach most suited to the majority of regulatory dilemmas that we face currently.

Even so, that is not the end of the story. After convergence is achieved, regulators will still have an interest in regulating market participants. Differences may arise in how the regulations are applied. One critical element of creating a level playing field through convergence is having similar enforcement regimes for those standards. Disparities in enforcement can wreck the benefits of perfectly converged standards. This means that convergence must be seen as an ongoing process, beyond the standards themselves.

IV. Examples of Cross Border Regulation

Having briefly explored definitions for these regulatory approaches, I'd like to spend the remainder of my time discussing selected areas in which cross-border regulation has or is taking the form or equivalence, convergence, and even, possibly, harmonization.

A. Credit Rating Agencies

Convergence can be found in the regulation of credit rating agencies worldwide. In the U.S., the SEC has relied on credit rating agencies since at least 1975. In fact, in 1981, the Commission reversed its historic policy of precluding disclosure of security rating in registration statements, prospectuses, and other offering documents and embarked on a new approach to credit ratings that permitted, but did not require, that issuers disclose security ratings assigned by rating organizations to classes of their debt securities, convertible debt securities, and preferred stock. In 1997, the Commission proposed a rule to refine the process in which ratings agencies were nationally recognized. The rule was not adopted for a variety of reasons.

A few years later, in 2002, with the increasing reliance on ratings not only in the Federal Securities Laws, but elsewhere, the Commission prepared a study exploring numerous facets of the industry. The Commission identified several areas that it believed particularly were relevant to further developing our regulatory approach to credit rating agencies, and issued a concept release soliciting input from the public on the role that do and should play in the markets. Prominent among these areas were the concepts of information flow and how information is given, analyzed and disseminated to these agencies; potential conflicts of interest for these agencies, the extent to which credit rating agencies engage in anticompetitive or unfair practices, barriers to entry in the industry, and ongoing oversight. Presently, the staff continues to review the comments on these issues relating to the rating agencies' role in US securities regulation, and I anticipate seeing a rule proposal this year.

Yet, credit ratings and the agencies that provide them are central figures in the world debt markets. Last September, shortly after the Commission's concept release was published, IOSCO published a report and principles for credit rating agencies that have become the principal influence and framework for regulation and standards for many countries. I was the Chair of the task force that prepared the report and principles and I can tell you that the impetus behind its preparation was due in large part to many of the concerns that drove the preparation of the Commission's report and concept release. Although credit rating agencies vary widely by size, focus and the markets in which they operate, we were able to distill a set of principles that can assist regulators in developing regulations to ensure that credit rating agencies produce informed, independent ratings. The principles fit into four categories: the quality and integrity of the rating process; independence and conflicts of interest; transparency and timeliness of ratings disclosures; and use of confidential information.

Not surprisingly, these categories encompass many of the considerations the SEC believed warranted further explorations after the publication of the 2002 report. The opportunity presented by this commonality has not been overlooked. Neither the US nor many member states have taken additional steps in the regulation of rating agencies, meaning that convergence of national approaches to credit rating agencies is not only possible, but should be encouraged. In fact, the IOSCO Technical Committee reconstituted its credit rating task force this spring to develop an international code of conduct that will assist rating agencies and regulators in putting the IOSCO credit rating agency principles into effect. The code offers a set of practical measure that will serve as a guide to help implement the Principles' objectives and promote a converged standard for credit rating conduct throughout the world. The code is currently being discussed within IOSCO and with industry and will be presented to the member regulators for finalization this winter.

There is no doubt that rating agencies and their activities continue to provoke intense interest in Europe. In January 2004, the European Parliament issued a nonbinding resolution on credit rating agencies that called on them to improve their transparency and avoid conflicts of interest that may undermine the integrity of their analyses. In July, CESR issued a call for evidence as part of its response to the Parliament's resolution. CESR will, in turn, provide its advice regarding rating agencies to the European Commission by April 2005. Separately, in March, the German Parliament issued a nonbinding resolution calling on IOSCO to create an international Code of Conduct that includes an issuer right of appeal for a rating issued by a rating agency as well as greater input into the rating process.

This last factor may not meld in with the endpoint of the majority of jurisdictions, but most of the goals of rating regulation are the same - in large part thanks to the efforts of IOSCO. The key will be in implementing the principles and the code of conduct. I can assure you that the Commission staff's recommendation is being influenced by this continuing dialogue in which it participates as a part of the IOSCO subcommittees and task forces.

B. International Accounting Standards

Another area in which, until recently, convergence seemed all but imminent is the international accounting standards. Effective financial reporting begins with a company's management, which is responsible for implementing and properly applying accounting standards. In addition, the use of accounting standards must be supported by an effective financial reporting infrastructure. The SEC consistently has sought to encourage the development and enhancement of an effective global financial reporting infrastructure that would support the use of such standards. The Commission has opined that the elements of an effective global financial reporting standards should include: effective, independent and high quality accounting standard setters; processes for interpretation and consistent application of accounting standards; high quality auditing standards; audit firms with effective quality controls worldwide; profession-wide quality assurance; active regulatory oversight of auditing; and, regulatory review and enforcement of accounting standards. Accordingly, beginning in the 1990s, the SEC increased efforts and coordination with other securities regulators, primarily through IOSCO, to develop accounting standards that could be used for cross-border listings. In doing so, more focus was placed on the work of the International Accounting Standards Committee, an international standards-setting body that preceded today's International Accounting Standards Board, or IASB.

Specifically, in February of 2000, the SEC issued a concept release on International Accounting Standards (IAS), seeking public comment on experiences with the use of IAS, the quality of the current set of IAS and whether those standards were comparable to U.S. GAAP, elements of a global financial reporting infrastructure, and issues relating to the SEC requirements for reconciliation between IAS and U.S. GAAP for foreign private issuers listing in the U.S. During 2000-2001, the SEC was involved in the restructuring of the aforementioned IASC into the current IASB, which is a full-time, standard setter. During the time, the EU indicated that it would adopt IAS in 2005 for all listed EU companies and the SEC staff encouraged the IASB to begin working on the areas of difference between the IAS and U.S. GAAP that necessitated reconciliation entries.

In 2002, then-SEC chairman Harvey Pitt, the Commissioners and the senior staff made a number of speeches and statements throughout the year, highlighting the need for the "globalization of account standards," encouraging the Financial Accounting Standards Board (FASB) and the IASB to work together toward convergence of accounting standards, and noting that convergence was not a one-way street, that no single jurisdiction would necessarily have all the best answers. In October of that same year, the FASB and IASB announced a Memorandum of Understanding, known as the Norwalk Agreement, formalizing the commitment to achieve the convergence of U.S. GAAP and IAS. Since then, the SEC staff has been actively working with European authorities on many technical issues critical to the development and success of the newly christened international financial reporting standards, or IFRS. The ultimate aim, in the words of the SEC's Chief Accountant, is to eliminate the need for reconciliation between IFRS and U.S. GAAP. This can only come once all nations recognize the need for independent standard setting and the unfettered recognition of the boards that set those standards.

In the meantime, in anticipation of the EU and other countries' adoption of IFRS in 2005, the SEC staff has been collaborating with other securities regulators (primarily through IOSCO) to institute measures to improve communication and cooperation among regulators and to promote consistent interpretation, application and regulatory review of accounting standards used to prepare financial statements. To facilitate the transition to IFRS in the EU and other countries electing to adopt IFRS, the SEC issued in March of this year a proposed rule for First-Time Application of International Financial Reporting Standards, which is a one-time accommodation relating to financial statement prepared under IFRS for foreign private issuers registered with the SEC. The staff has reviewed the comment letters received and is currently working on recommendations for actions.

But all may not be as rosy at it seems on the road to convergence, and equivalence may be the term of choice across the ocean (which gets into my earlier discussion of the difficulty in defining these terms). As it is, the Europeans are still debating whether to require or accept all IFRS, including the standards for financial instruments, though the use of IFRS has been written into law. More recently, the EU has finalized a directive creating an EU-wide prospectus (the Prospectus Directive) and is about to finalize another directive on EU-wide periodic reporting requirements (the Transparency Directive). These directives require all non-EU companies listed in the EU to prepare their financial statements according to IFRS, or to use an "equivalent" set of accounting standards. The EC has clarified that US GAAP may be used until 2007, at which point equivalence of US GAAP to IFRS will need to be assessed. The EC has tasked CESR with creating a method for determining equivalence of non-IFRS accounting standards. Is convergence, as I have defined it, not to be?

The EC view appears to be that convergence should not be a prerequisite for acceptance of IFRS without reconciliation. In general, EU countries have shared a culture of accepting considerable variations in accounting in cross-border listings and also in utilizing a national recognition approach to regulation. This leads the EU to urge the U.S. to discontinue its present reconciliation requirements without conditions. The EU claims to support convergence of U.S. GAAP and IFRS but it is concerned that progress is slow and it has urged the SEC to come up with a "roadmap" describing the steps that must be taken in order for the SEC to accept IFRS without reconciliation.

The EC's frustration with the speed of the convergence project also may be a distraction from the difficulties the EU has had with regard to the adoption of IAS 32 and 39. As we have been discussing, an independent IASB was set up over three years ago specifically to avoid the problem of political interference and yet now it is being subjected to intense lobbying pressure to lower its standards. Some European banks and insurance companies have been vigorously protesting portions of two important international standards, IAS 32 and IAS 39, that, pending European Union approval, would become binding law throughout the Union next year. Similar standards that have required accounting for financial instruments (included derivatives) are already an accepted part of US GAAP, so European approval would be a key step toward achieving convergence.

I was disappointed in the delay in European take-up of the new International Accounting Standards IAS 32 and IAS 39. I was further disappointed with the carve-up of IAS 39. The two standards - which would force companies to account for derivatives gains or losses - in 2005 has been sidetracked by the European Commission, which is under pressure from European banks and insurers unhappy about the potential effects of the standards on their balance sheets.

I am deeply alarmed by this action. In view of the urgent need to have all European listed companies reporting on IAS by 2005, this is not a good message to send either to accountants or to the investment community. I certainly do not believe that you can have one or two standards which vary from formal IAS and this sets a terrible precedent. This illustrates why so much emphasis has been placed on the need for professional independence in the decision-making processes of both FASB and IASB. Consistent bending to the will of political pressures will not, and cannot, lead to either consistency or quality. The result of such politicized decision-making would be to weaken, perhaps irreparably, the foundation of effective accounting practices in a rapidly globalizing world economy.

As Paul Volker, Chairman of the Trustees of the IASC Foundation, recently stated before the United States Senate Committee on Government Affairs: "every company operating internationally, investors and analysts generally, and regulators and governments, share strong interest in common accounting standards in major countries. In addition to the European Union itself, most other countries have signaled their intent to adopt international standards. But piecemeal rejection of key standards -- like IAS 39 in Europe- would clearly erode the basic purpose of creating a "level playing field", confusing and fragmenting markets and investors."

Refusal to adopt the full set of IAS standards threatens the goal of convergence between IAS and US GAAP, and the all-important goal of one set of global standards. As Allen Blewitt, the Chief Executive of the Association of Chartered Certified Accountants, recently stated: "How can the US take Europe's professed aim of wanting better standards seriously if Europe will not back what the IASB is trying to do?" The goal of achieving a truly global set of financial reporting standards is vital for the credibility of the world's capital markets. All parties must accept that the process of global convergence will necessarily involve some pain and some gain - they must keep their eye on the bigger picture.

Political influence is not just present on this side of the Atlantic. Some US businesses are vigorously urging the U.S. Congress to prevent, by law, expensing of employee stock options, as the FASB now proposes. This requirement is already in place for the IASB, and will in all likelihood be accepted and enforced in the European Union and many other countries next year. Failure of the U.S. to have a similar approach will inevitably set back the work toward convergence. There is a broad area of agreement among accountants and others that employee stock options are an expense and should be so recorded in financial statements. While there has been controversy and uncertainty as to how to measure that expense with reasonable precision and consistency, the logic of both the U.S. and the international approach is to delegate that difficult decision to the professional standard setters. I trust that legislators and other policy-makers both in the United States and Europe will respect that carefully conceived process. To do otherwise will surely undercut all that is being achieved toward convergence in accounting standards around the world, a key ingredient of a well functioning system of international finance.

This is particularly true when one considers that following on the steps of the convergence plan for accounting standards, the SEC staff also is monitoring the development of a global set of high-quality auditing standards and an independent body, the PIOB, for overseeing the development of such standards. While there has been no formal declaration of an agreement to strive for convergence, such as the Norwalk Agreement for accounting standards, there is no question that that is the direction the wind is blowing. For this reason, it concerns me that there have been some delays in the process of establishing the PIOB, but I will not belabor the point now.

I think that most of us would agree that globalization of financial markets is a positive development. The increased and more diverse flows of capital make all of our markets more liquid and resilient. But converging, or even - are I say it - harmonizing, regulatory approaches to global markets presents many challenges. Even jurisdictions that share a commitment to free and open markets can have vastly different regulatory systems - different legal systems, market structures, economic systems and regulatory philosophies make for very diverse systems of regulation. The key to better coordination of global regulatory approaches is maintaining a dialogue while working towards convergence and beyond.

C. Canadian Multi-jurisdictional Disclosure System

In 1991, the Commission made its first formalized, public overture to working with other regulators in facilitating cross-border offers and sales by adopting the Multi-jurisdictional Disclosure System (MJDS) with Canada. Through the MJDS, the Commission began to recognize the merits of coordinating regulatory efforts with other regulators on a bilateral basis. It was the similarity of the Canadian and U.S. systems of securities regulation made Canada a natural counterparty to the SEC's fledging efforts in an international approach to regulation. Prior to the adoption of the MJDS, Canada's similarity in business and accounting practices to U.S. practices led the SEC to treat Canadian companies on a similar basis to U.S. companies. With the MJDS, the Commission used this similarity as the basis for a modified offering process.

Under the MJDS, Canadian foreign private issuers that meet eligibility criteria qualifying them as large, established companies are viewed as meeting certain of the SEC's securities registration and reporting requirements if they provide disclosure documents prepared according to the requirements of the relevant Canadian securities authorities. At the time that it adopted the MJDS, the Commission noted as a rationale for the new system the substantial growth in purchases of foreign securities by U.S. investors, as well as the increase in offshore offerings made by U.S. issuers. It also noted that foreign issuers were unwilling to extend rights offers, business combinations, exchange offers, or cash tender offers to U.S. shareholders because they wanted to avoid the application of the U.S. federal securities laws. This usually resulted in the exclusion of U.S. shareholders from their offerings.

At the same time that the SEC adopted the MJDS, the Canadian Securities Administrators published National Policy Statement No. 45 to adopt a parallel multijurisdictional disclosure system in Canada. Under that system, U.S. issuers could satisfy certain Canadian securities registration and reporting requirements by using documents prepared according to the SEC's requirements.

The bilateral MJDS initiative paved the way for multilateral cooperation. It demonstrated for regulators the benefits of collaborating with each other on a one-on-one basis, and more importantly, highlighted the potential for multilateral cooperation. In this regard, for a number of years the Commission has been working with other members of IOSCO to develop a set of international standards for non-financial statement disclosures that could be used in cross border offerings and listings. The product of these efforts may be found in the International Disclosure Standards developed by IOSCO.

D. International Disclosure Standards

The international disclosure standards consist of ten core disclosure items that reflect a consensus among securities regulators in the major capital markets as to the types of disclosures that should be required for cross border offerings and listings. They cover fundamental disclosure topics such as the description of the issuer's business, results of operations and management and the securities it plans to offer or list. Specifically, the ten core items include:

The identity of directors, senior management and advisors;

Offer statistics and expected timetable;

"Key information," including requirements for selected financial data, the reasons for the offer and the expected use of proceeds, and information about risk factors;

"Information on the company," including requirements for a description of the issuer's business and properties;

"Operating and financial review and prospects," which corresponds to the U.S. requirement for management's discussion and analysis of financial condition and results of operations;

"Directors, senior management and employees," including requirements relating to compensation and shareholdings;

Major shareholders and related party transactions;

"Financial information," including the presentation of financial statements and requirements that correspond to current rule 3-19 of regulation s-x, as well as requirements relating to legal proceedings;

"The offer and listing," including a description of the offering, including the plan of distribution, trading markets, selling shareholders, dilution and expenses; and

"Additional information," including requirements for, among other things, a description of the issuer's share capital, significant provisions of its articles of incorporation and bylaws, its material contracts, and applicable taxes.

In 1999, all ten of these items were incorporated into Form 20-F. The Commission also revised the Securities Act registration forms designated for use by foreign private issuers, and related rules and forms, to reflect the changes in Form 20-F. On the whole these amendments represented a major step in the convergence and even harmonization of global disclosure standards. As a result, issuers find it easier to offer or list securities outside their home country by preparing a core disclosure document that, with a minimum of national tailoring, may be accepted in multiple jurisdictions. This disclosure document can serve as an "international passport" to the world's capital markets by reducing the barriers to cross-border offerings and listings.

The amendments to Form 20-F are not the only examples of attempts to globalize the US disclosure and reporting requirements with international standards for disclosure and reporting. The integrated disclosure system designed for foreign private issuers provides a number of accommodations to practices in other jurisdictions - accommodations that could be considered recognition of equivalent regulation in foreign jurisdictions. These accommodations include:

interim reporting on the basis of home country and stock exchange practice rather than quarterly reports;

exemptions from the proxy rules and the insider reporting and short swing profit recovery provisions of Section 16;

aggregate executive compensation disclosure rather than individual disclosure, if so permitted in the issuer's home country;

acceptance of three International Financial Reporting Standards (IFRS) relating to cash flow statements (IAS # 7), business combinations (IAS # 22) and operations in hyperinflationary economies (IAS # 21);

offering document financial statements updated principally on a semi-annual, rather than a quarterly basis; and

foreign companies may prepare their financial statements using a comprehensive body of generally accepted accounting principles (GAAP) other than U.S. GAAP. Foreign companies that present their financial information in accordance with the GAAP of their home country or International Accounting Standards must include a reconciliation of significant variations from U.S. GAAP.

The amendments to Form 20-F as well as these accommodations represent significant step towards the convergence and harmonization of international disclosure standards. They significantly reduce the regulatory hurdles to uniformity among disclosure standards, enhancing the reliability and comparability of financial and other information made available to investors that have or are contemplating investments without borders. Of course our work is not yet done - looking forward, we will continue to explore opportunities to further internationalize and harmonize disclosure regimes with the goal of serving our dual purposes of protecting the interests of security holders and of creating more liquid international markets.

E. Foreign Screens in U.S.

Because no discussion of globalization of the securities markets is complete without it, I'd like to briefly mention foreign screens. The U.S.-EU dialogue on this subject is focused on the issue of locating foreign stock exchange trading screens in the United States without first registering with the SEC. Several EU stock exchanges have asked for an exemption from SEC registration requirements in order to place computer trading screens in the United States. Doing so would give these exchanges - and the issuers on these exchanges - direct access to U.S. investors. Currently, US federal securities laws generally require all exchanges operating in the United States, and all securities traded on those exchanges, to be registered with the SEC. The EU exchanges argue that, because they are regulated elsewhere, these exchanges and issuers should not be subject to the regulation and disclosure requirements of the 1933 and 1934 Acts and the Sarbanes-Oxley Act. This argument falls somewhere in between the national recognition and equivalence definitions, depending on the jurisdiction in question.

The dialogue has proven useful in improving our understanding of each other's points of view on this issue. The SEC has used the avenues of communication to describe for our European colleagues the statutory basis of U.S. registration requirements and the investor protection concerns that lay behind them. We have also noted that there are certain fairness concerns if foreign exchanges are not subject to the same registration requirements as are U.S. stock exchanges. This particular concern has raised the eyebrow of those in Congress who see foreign access on terms and conditions different than those required of U.S. exchanges as jeopardizing investor protection. At the same time, as the regulator, we have sought to garner an understanding of the differences and similarities in the regulation of exchanges as practiced in the United States and the European Union. By doing so, we hope to analyze whether there is any weight to the law makers' concern.

Consideration of the issue of screen placement was deferred after Chairman Donaldson's announcement last year that the SEC was undertaking a comprehensive review of the U.S. market structure. Wrapped into that review is an analysis of the self-regulation model. Depending on the results of the review, all exchanges operating in the United States, whether domestic or foreign, could be subject to a changed regulatory landscape. Accordingly, the review needs to be completed before the issue can be considered further. It may be that we end up proposing an exchange and/or regulatory structure for exchanges that has more characteristics of the European models. As I noted before, the lessons between the U.S. and EU are a two-way street. We will continue to update our European counterparts about the progress of the market structure review.

V. International Assistance

An increasingly important component of domestic enforcement regimes is the ability of securities regulators to provide, as well as receive, international assistance. Indeed, the internationalization of the world's securities markets and the increased frequency of cross-border trading activity have made reliance on domestic powers alone insufficient. Strong international cooperation is vital to the quick, thorough and accurate resolution of international enforcement investigations. These statements are almost axiomatic today. But this wasn't always the case. Until the 1990s, regulators in the world's major markets often lacked the legal and practical ability to share with their foreign counterparts information vital to the resolution of cross-border investigations. The result was that, when the investigative trail crossed its jurisdiction's borders, it quickly became cold.

Today, all IOSCO jurisdictions recognize that their securities regulators should have comprehensive inspection, investigative, surveillance and enforcement powers. Every IOSCO member also recognizes that all securities regulators should have the authority to obtain and share public and non-public information with their foreign counterparts. Indeed, through the IOSCO Multilateral Memorandum of Understanding (MOU), the world's securities regulators have reached broad consensus on what is required of regulators to be considered responsible members of the international regulatory community.

The Multilateral MOU, adopted in May of 2002, is the first global information-sharing arrangement among securities regulators, and it sets a new international benchmark for cooperation critical to combating securities and derivatives violations. It expresses a commitment by IOSCO members to putting in place efficient and effective arrangements for information-sharing to address illegal use of the securities and derivatives markets, including market abuse and fraud.

The Multilateral MOU specifies the particular types of information a signatory is expected to provide to counterparts upon request. This information consists of client identifying records from bank and brokerage accounts, bank and brokerage transaction records, and beneficial ownership information of non-natural persons organized in the jurisdiction of the requested authority. The MOU contains express provisions requiring the confidentiality of the information to be shared. Specifically, the MOU provides that, except for uses specified in the MOU or in response to legally enforceable demands, information provided under the MOU will be kept confidential. The MOU thus permits the use of the information to: further an investigation, ensure compliance with the securities laws, conduct civil or administrative enforcement proceedings, assist in surveillance or enforcement activities of self-regulatory organizations, and assist in criminal prosecutions.

The IOSCO Multilateral MOU now has 25 signatories, with more added every few months. Several of the most recent signatories only just received the legal authority required by the MOU. Their legislatures granted such legal authority precisely because the Multilateral MOU is such a powerful statement of what the international community believes is needed of securities regulators in today's global environment.

I could continue to discuss examples of the various regulatory models and their application in this cross-border environment, but I see that my time is running short. In conclusion I would like to emphasize a few points I hope I have conveyed to you today and paint a picture of my vision.

VI. Conclusions

First, as the SEC and European regulators consider new regulations, we frequently find that we share similar concerns even as we adopt different mechanisms to addressing these concerns. Continuous dialogue between the regulators helps us to shape our policies in ways that are similar, where desirable, or at least not conflicting. Duplicative or even contradictory regulation in this cross-border environment offers nothing in the way of investor protection and merely places an unnecessary burden on issuers, firms and investors. Accordingly, I strongly urge that the channels of communication are not only kept open but also used regularly. Dialogue is the key to understanding equivalence, achieving convergence, and striving for harmonization.

That being said, the second point I'd like to make is that regulators worldwide are limited by political forces beyond their control. This frequently accounts for the differences in regulatory approaches. I am not suggesting that this always is a bad thing. Law makers have a responsibility to protect their investors, issuers, markets, and other industry participants from disparate regulation. But, in this cross-border environment, their goal should be equality not dominance. It is specifically for this reason that I believe independent standard setting is so crucial to the goal of convergence. Only by removing outside influence, can a fair and uniform set of standards be produced, whether for accounting, auditing, disclosure, credit rating agencies, and so on.

This leads me to my next point, the race for the top or the bottom? Some people are under the impression that independent, standard-setting boards develop standards by finding the least common denominator to ensure the broadest adoption of the standards. This argument also has been made to suggest that large international organizations that set standards for their membership, such as IOSCO, amount to no more than a "regulatory race to the bottom." I would counter in both cases that the work produced in these formats is an exercise in formulating the highest quality standards in any given area. And, in fact, it is through both of these types of procedures that we have seen the greatest and the most contributions to convergence to date.

I cannot stress how important it is for us to think of convergence as we move forward. As I mentioned earlier, the convergence discussion is ripe particularly as we address new regulatory issues because everyone begins in the same place. As I see it, one day the same registration statement will satisfy regulatory requirements both in the U.S. and in the EU. Global accounting standards will be in place in the next decade. Auditing and disclosure standards are a little farther off, and uniform implementation and enforcement of global standards clearly trail behind. I am not so naive to think that these last hurdles, which are jurisdiction specific, will be easy to clear. BUT, the train has left the station. Once the standards are the same in different countries, or principally the same, firms should experience much lower costs of operating across borders and investors should experience lower costs to access greater pools of capital. Different jurisdictions will be responsible for compliance, but the rules themselves will be the same. The final question will be whether convergence and harmonization will regulate us out of a job and there will be one global regulator. Okay, maybe that's taking it a little farů.at least in my lifetime.

Thank you for your attention. I look forward to your questions.


Modified: 01/11/2005