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PRESS RELEASE ARCHIVE COMMITTEE ON CAPITAL MARKETS REGULATION RELEASES Q1 2008 COMPETITIVENESS UPDATE The Committee on Capital Markets Regulation (“Committee”), has released its competitiveness update for the first quarter of 2008 showing that the U.S. retains a shrinking share of a shrinking market. The Committee, an independent and nonpartisan research organization dedicated to improving the regulation of U.S. capital markets, said that the historically low market activity in Q1 reflected the impact of turmoil in the credit markets. There were just 25 global IPOs by foreign companies in Q1 2008 valued at $8.3 billion, compared with 335 in 2007 valued at $95.8 billion, the Committee said. U.S. IPO activity was equally anemic. In Q1, there were just 12 IPOs by U.S. companies, compared with 220 in 2007, the Committee added. It added that:
In summary, Q1 data must be read in the context of very low IPO levels due to the market turmoil, the Committee said in its update. However, it added, key measures show a continuing loss of U.S. competitiveness. Without major reforms in shareholder litigation, the regulatory process and shareholder rights, we expect these trends to continue, the Committee concluded. Beginning with its December 2007 report—“The Competitive Position of the U.S. Public Equity Market,” the Committee has tracked on a quarterly basis 13 separate measures of the competitiveness of U.S. capital markets. These measures fall into five categories: (1) equity raised in public markets; (2) the relative size of the private Rule 144A and public equity markets in the U.S.; (3) cross-listings and delistings by foreign companies; (4) trading on U.S. and non-U.S. stock exchanges; and (5) regional origin of U.S. investment banking revenue. Historical data through Q1 2008 is now available on the Committee’s website at www.capmktsreg.org. The following statement has been issued by Prof. Hal S. Scott, Director of the Committee on Capital Markets Regulation, in Response to the Treasury Department’s “Blueprint for A Modernized Financial Regulatory Structure” Summary Coordination Challenge: It is unclear how the actions of five regulatory bodies included in the Blueprint* would be coordinated. Consolidate Oversight and Enforcement Responsibilities: Because the line between prudential oversight and enforcement of market conduct rules is not bright, it may be wiser to follow the example of such major financial markets as those in the United Kingdom and Japan, which have chosen to consolidate prudential oversight and market conduct within a single consolidated regulatory body, e.g. the Financial Supervisory Authority in the U.K. Make the Supervisory Body Independent: Supervisory functions should be lodged in an independent body (as is the case in Japan and the U.K.), not located in a political institution like the Treasury. Put Fully Consolidated Oversight Before Partial Reforms: While the Blueprint’s proposed initial phase focus on immediate problems is no doubt necessary, we think it unwise to place an intermediate phase of partial consolidation and reform, ahead of moving directly to the larger question of fully consolidated oversight. Congressional leadership and presidential candidates already have expressed a willingness to embrace fundamental regulatory reform and we should move expeditiously towards that goal. Statement I applaud Secretary Paulson and his staff at the Treasury Department on Monday’s release of its Blueprint for a Modernized Financial Regulatory Structure. The report offers a wide range of thoughtful and innovative proposals to reform the structure of financial regulation in the United States. While the Blueprint’s many detailed proposals will no doubt generate much discussion and debate in the weeks and months ahead, we should not lose sight of the fact that the Department has launched an important and long overdue national debate as to the appropriate structure of financial regulation in this country. A better functioning financial regulatory structure would benefit all Americans and is essential for the continued competitiveness of the country’s economy. A better regulatory structure would serve the interests of all investors and financial institutions. The Department and Secretary Paulson deserve much credit for launching this process. The overarching virtue of the Treasury Department’s initiative is its goal of creating a world class regulatory structure for the United States. Rather than accepting our current patchwork of regulatory bodies and supervisory practices more suited to the Nineteenth Century than the Twenty-First, the Blueprint opens a debate on potentially transformative reform of our system of financial regulation. The Department is to be especially commended for looking beyond our national borders to study other regulatory models that are used in today’s global financial markets. Whether one considers the “twin-peak” approach of Australia and the Netherlands or the more integrated structures employed in the United Kingdom, Japan, and Germany, all should agree that we must measure the quality of our regulatory structure against the highest international standards. Through this process, we should seek to embrace the best practices without being limited to perspectives from within our existing regulatory structures and U.S. market participants. Another promising feature of the Blueprint’s proposals is its identification of the President’s Working Group on Financial Markets as an appropriate and immediately-available platform for coordinating oversight of our financial system. Our Committee called for such an expanded role in its Interim Report of November 2006. In the past few months, the Working Group has played a key role in coordinating the government’s response to recent turmoil in the financial markets. The Blueprint envisions that the Working Group will build upon this experience and play a more active continuing role in coordinating financial regulatory policy, paying increased attention to issues of investor and consumer protection across all sectors of the financial services industry, and serving as a national sounding board to ensure that the future reforms are both comprehensive and cost-effective. Finally, the Department is to be commended in recommending prompt legislative action to enhance the scope of the Federal Reserve Board’s statutory powers to match the Board’s recent interventions. After all, if primary dealers, which include major securities firms, are to have access to the Federal Reserve’s liquidity facilities and lending functions, the Board must have knowledge of the operations and risks of such firms, as well as some supervisory oversight of their activities. The Treasury proposes intermediary reforms, such as mergers of the Office of Thrift Supervision with the Comptroller of the Currency and the Commodities and Futures Trading Commission with the Securities and Exchange Commission. The Treasury also envisions the creation of two new insurance offices in the Treasury, an Office of National Insurance to regulate insurance companies that would be permitted to seek an optional federal charter and an Office of National Insurance to address international regulatory issues and to ensure proper and coordinated state regulation of state-chartered insurance companies. We believe that the times demand setting aside intermediary steps so that we can begin to create the right federal regulatory structure now. The Treasury has set forth a vision of that structure. From an initial reading, we believe the Treasury’s vision raises two overarching questions of regulatory design and one narrower question of implementation. First, as to regulatory design, the Blueprint proposes as an “optimal” U.S. system a structure consisting of mainly “three peaks,” with the Federal Board providing the first peak of market stability oversight and then a second prudential body – to be located within the Treasury Department – providing a second peak of prudential oversight, and finally a third independent regulatory body – presumably built out from a combined SEC-CFTC – that would have responsibility for market conduct rules. In addition, the Blueprint mentions the preservation of the Federal Deposit Insurance Corporation and a new Corporate Finance Regulator. In sum, there would be five regulatory bodies and it is unclear how the actions of these five bodies would be coordinated. Arguments can be made for dividing prudential regulation from market oversight if the market oversight is to be performed by the Federal Reserve Board, which must remain independent and separate from the rest of the government. However, the line between prudential oversight and market conduct rules is not bright and many prudential regulations, like capital requirements, also protect consumers and investors who are the chief focus of market conduct regulation. Countries that have established separate bodies dealing with market conduct and prudential regulation tend not to have central banks with the kind of strong supervisory authority that the Blueprint rightly envisions for the Federal Reserve Board. We believe, therefore, that we might be better served following the example of the major financial markets, such as the United Kingdom and Japan, which have chosen to consolidate prudential oversight and market conduct within a single consolidated regulatory body, e.g. the Financial Supervisory Authority in the U.K. Consumer and investor protection are extremely important. Putting these functions, along with others, in one body should not and need not diminish the strength of such protections. Also, a unified regulatory structure should not and need not mean all financial institutions are regulated in the same way. The risks of institutions, which often vary with size, would dictate the regulatory approach, not the name or label put on the institution. A second major question of regulatory design concerns the appropriate governmental location of a consolidated regulator. The Blueprint envisions that at least the prudential regulatory body will be housed within the Treasury Department itself. Again, this is a plausible position, as the Comptroller of the Currency has been housed in the Treasury for nearly a century and a half, and has earned an admirable reputation for expertise and efficiency. This location, however, also has substantial drawbacks. The Treasury Department remains a political institution and is likely to be more heavily influenced by political considerations than would be an independent agency. Again, if one looks to the emerging practices of consolidated financial supervisors around the world, for example the U.K. and Japan, the trend is very much towards moving supervisory functions out of ministries of finance and into more independent bodies. While the Blueprint’s proposed initial phase of actions to address immediate problems is no doubt necessary and desirable, we think it unwise to dissipate energy on an intermediate phase of partial consolidation and reform, rather than to move directly to the larger question of fully consolidated oversight. Congressional leadership and presidential candidates have already expressed a willingness to seek fundamental regulatory reform. Now that the Treasury Department has produced a framework for debating an optimal system of financial regulation, we should move expeditiously towards that goal.
NON-U.S. COMPANY DELISTINGS FROM NYSE SOARED IN 2007 The New York Stock Exchange’s (NYSE) foreign company delisting rate skyrocketed to 15.1% in 2007 from 6.6% in 2006, according to a new study by the Committee on Capital Markets Regulation (CCMR). The study also found that the dramatic increase in foreign company delistings in 2007 was more than double the average rate of 7.3% in the 10-year period from 1997 to 2006. By contrast, domestic company delisting rates – which largely reflect mergers – increased to only 8.0% in 2007 from 5.9% in 2006. The findings will be discussed at the U.S. Chamber of Commerce’s Second Annual Capital Markets Summit: Strengthening U.S. Capital Markets for All Americans, by Hal S. Scott, Nomura Professor, International Financial Systems, Harvard Law School and Director of CCMR. “It is likely not a coincidence that the new SEC rules permitting deregistration by foreign companies with relatively low U.S. trading volumes became effective June 4, 2007,” Prof. Scott said. “Of the 68 foreign companies that delisted in 2007, 50 – or 74% – delisted on or after June 4. To a certain extent, the 2007 spike in foreign delistings represents pent-up demand to leave. This pent-up demand, however, is itself a reflection of the unattractiveness of the U.S. public equity market.” The Committee first reported a significant increase in foreign company delistings in its December 4, 2007 report, The Competitive Position of the U.S. Public Equity Market. At that time, the Committee said a record number of foreign companies had delisted from the NYSE as of October 2007. Since the December report, the Committee has examined the nationality and market valuations of the delisting companies and found that delisting companies were overwhelmingly from Western Europe. Of the 53 companies that delisted not due to an acquisition, 43 were from Western Europe (8 each from the UK and France and 7 from Germany) and 4 were from Australia. Only 5 of the 53 delisting companies were from emerging market countries Chile (1), Brazil (1), Hong Kong/China (2) and Israel (1). Litigation, Poor Regulatory Process Offset The Committee also examined the market valuations of the delisting companies using “Tobin’s Q” to understand if the U.S. was only losing companies not getting a premium by listing in the U.S. Tobin’s Q – essentially the ratio of a company’s market value to the book value of its assets – measures the listing premium. A Tobin’s Q greater than 1 indicates that the market places a value on the company greater than its book value. A Tobin’s Q less than 1 indicates that the market places a value on a company less than its book value. For each delisting company, the Committee determined its Tobin’s Q as well as the average Tobin’s Qs of companies from the same home country in the same economic sector that had not listed in the U.S. (“the compatriot set”). Finally, for each delisting company, the Committee looked at the ratio of its Tobin’s Q to the Tobin’s Q of the compatriot set – a rough measure of the U.S. listing premium enjoyed by the delisting company. The Committee found:
Prof. Scott said, “One economic study has contended that U.S. listing premiums evidence the competitiveness of the U.S. public equity market. However, the fact that foreign companies enjoying listing premiums are leaving the U.S. suggests that listing premiums do not ensure competitiveness. We suspect the reason so many foreign companies with listing premiums are delisting is litigation and a poor regulatory process which are significant enough factors to countervail the benefit from listing premiums.” CCMR is a non-partisan committee of independent U.S. business, financial, investor and corporate governance, legal, accounting and academic leaders. It was formed in the fall of 2006 to study and report on ways to enhance the competitiveness of the U.S. capital markets.
The following statement has been issued by Prof. Hal S. Scott, Director of the Committee on Capital Markets Regulation, in response to this morning’s testimony by SEC chairman Christopher Cox before the House Small Business Committee: One Year Delay of Section 404(b) for Small Companies The Committee on Capital Markets Regulation applauds SEC Chairman Cox’s testimony proposing the delay of an additional year before requiring that small companies get external audits under Sarbanes Oxley Section 404(b), in order to complete what amounts to a cost-benefits analysis of that requirement. As we noted in our Interim Report of November 2006 and in our testimony in June 2007 before the U.S. House Committee on Small Business, Section 404 costs, averaging $4.4 million in the first year, have disproportionate impact on small companies. Let’s wait to see whether these costs are substantially reduced by the SEC’s and PCAOB’s recent Section 404 reforms before applying them to small companies. Unreasonable 404 costs will either prevent small private companies from going public, or drive them abroad to do so. Indeed, our December 4th report on The Competitive Position of the U.S. Public Equity Market found that through the first three quarters of 2007, a remarkable 9.2% of U.S. companies did their IPOs only abroad.
COMPETITIVENESS OF U.S. PUBLIC EQUITY MARKET CCMR Study Finds Delistings Growing; More US Companies Listing Only Abroad; Share of Global Trading Value Falling; Share of 20 Biggest Global IPO’s Down to 0% The Committee on Capital Markets Regulation (CCMR) today released a report showing that the competitiveness of America’s public equity markets deteriorated through the first three quarters of this year and continues to be at historical lows. “It is particularly distressing that a year after the Committee sounded the alarm on our eroding competitiveness little has been done to address this problem. Our overall position is not improving and in some cases is getting worse,” said CCMR Director Hal Scott, the Nomura Professor and Director of International Financial Systems at Harvard Law School. The 32-page report shows that by any meaningful measure the competitiveness of the U.S. public equity markets has deteriorated significantly in recent years. This second CCMR report, released today, has been issued a year after the Committee’s Nov. 30, 2006 Interim Report, which provoked intense global discussion and controversy. Fully 12 of those 13 measures show a significant deterioration in U.S. competitiveness over time (and the sole exception remained flat). Since the November 2006 Interim Report – when the Committee first called for urgent action to address the problem – most measures either have continued to decline or failed to substantially improve. Specific findings released today include:
“With striking losses in our competitiveness already demonstrated, there simply is no longer any prudent argument for delay,” said Prof. Scott. “A year ago, the Committee outlined a number of constructive steps to address and restore and enhance our markets’ competitiveness. We know the policy measures that must be taken, but the response has been only about two on a scale of 10 – not nearly enough, or soon enough.” Today’s report, titled: “THE COMPETITIVE POSITION OF THE U.S. PUBLIC EQUITY MARKET,” can be accessed and downloaded at the Committee’s Web site: www.capmktsreg.org. (The Committee’s interim report and recommendations, issued Nov. 30, 2006, also are available at the Web site.) CCMR is a non-partisan committee of independent U.S. business, financial, investor and corporate governance, legal, accounting and academic leaders. It was formed in the fall of 2006 to study and report on ways to enhance the competitiveness of the U.S. capital markets. 12/5/2006 Press Release Harvard Law School Professor Hal S. Scott, Director of The Committee on Capital Markets Regulation, which late last week issued its Interim Report and recommendations on U.S. Public equity markets competitiveness, today issued on behalf of the Committee the following statement to clarify the Committee's position on the New York Stock Exchange's recently proposed elimination of broker discretionary voting in NYSE-listed companies' director elections. "The Committee supports proposed Rule 452 to eliminate broker voting for directors as applied to corporate issuers in order to assure fairness in the majority vote process. The Committee also believes that the application of Rule 452 to voting by mutual fund shareholders should be reconsidered in light of the practicalities of such situations," Prof Scott said. "However due to an editing error near the Nov. 30 printing deadline for the Interim Report, the Committee was erroneously stated to be requesting the NYSE to reconsider its proposed changes. In fact the Committee's actual request is sharply limited: the Committee supports proposed Rule 452 and suggests only that the Exchange reconsider how the Rule should apply to mutual funds. Prof Scott added: "Since shareholder rights are a central focus of the Committee's Report and continuing research, we felt it crucially important to make crystal clear our position on the important proposed director-election rule changes on which the NYSE recently (Oct. 24) filed for SEC approval."
COMMITTEE ON CAPITAL MARKETS REGULATION RECOMMENDS ENHANCING SHAREHOLDER RIGHTS AND CURBING EXCESSIVE REGULATION AND LITIGATION Interim Report Outlines 32 Recommendations in Four Key Areas To Make U.S. Markets More Competitive The Committee on Capital Markets Regulation, an independent and bipartisan group comprised of 22 leaders from the investor community, business, finance, law, accounting and academia, today issued its interim report with recommendations for changes in capital markets regulation based on the twin goals of enhancing shareholders rights while reducing excessive and overly burdensome regulation and litigation. The Committee outlined 32 specific recommendations in four key areas – shareholder rights, the regulatory process, public and private enforcement and Section 404 of the Sarbanes-Oxley Act of 2002 – to improve the regulatory system and give U.S. capital markets the competitive boost necessary to respond to the increasingly aggressive efforts of other countries to attract equity capital markets. “Maximizing the competitiveness of U.S. capital markets is critical to ensuring economic growth, job creation, low cost of capital, innovation, entrepreneurship and a strong tax base in key areas of the country,” said Glenn Hubbard, Dean of Columbia Business School and co-chairman of the Committee. “While U.S. capital markets historically have been the deepest, most liquid financial and lowest cost markets anywhere, the world is vastly different today. There are several viable markets for raising capital, and many companies now are using cost-benefit analysis – including the potential cost of litigation and the complexity of regulation – to focus on the competitive differences among the markets. John L. Thornton, Chairman of the Brookings Institution
and co-chairman of the Committee, said, “Investor protection and
shareholder rights are bedrock principles of U.S. capital
markets. The Committee believes that enhancing shareholder rights
and facilitating more efficient regulation will strengthen U.S. market
global competitiveness.” Findings on U.S. Capital Markets Competitiveness While some erosion of the historically immense U.S. market-share of global equity listings, trading and total equity financing is natural, it cannot fully explain why:
Key Recommendations Following are highlights of the Committee’s recommendations from each of the four areas of the report: Shareholder Rights
Regulatory Process
Public and Private Enforcement
Sarbanes-Oxley
9/12/2006 Press Release NEW INDEPENDENT NON-PARTISAN COMMITTEE TO
The Committee on Capital Markets Regulation, a newly formed independent group of U.S. business, financial, investor and corporate governance, legal, accounting and academic leaders, announced today that it will conduct a major study of how to improve the competitiveness of the U.S. public capital markets. It plans to issue a report with recommendations to key policy makers for specific changes in regulation and legislation by the end of November. "I am pleased to learn The Committee on Capital Markets Regulation, an independent group of highly-respected leaders in each of their fields, will examine the competitiveness of the U.S. public capital markets," said Secretary of the Treasury Henry Paulson. "This issue is important to the future of the American economy and a priority for me. I look forward to reviewing their findings and ideas." The committee is directed by Hal S. Scott, Nomura Professor and Director of International Financial Systems at Harvard Law School, and co-chaired by Glenn Hubbard, Dean of Columbia Business School, and John L. Thornton, Chairman of the Board of the Brookings Institution. The other committee members are Samuel DiPiazza, Global CEO, PricewaterhouseCoopers; Donald Evans, CEO, The Financial Services Forum; former U.S. Secretary of Commerce; Robert Glauber, Visiting Professor, Harvard Law School; former Chairman & CEO, NASD; Ken Griffin, President & CEO, Citadel Investment Group LLC; Charles O. Holliday, Chairman & CEO, Dupont; Cathy Kinney, President & Co-COO, NYSE; Ira M. Millstein, Partner, Weil, Gotshal & Manges; Steve Odland, Chairman & CEO, Office Depot; William G. Parrett, CEO, Deloitte; Jeffrey M. Peek, Chairman & CEO, CIT Group Inc.; Robert Pozen, Chairman, MFS Investment Management; Wilbur L. Ross Jr., Chairman & CEO, WL Ross & Co. LLC; James Rothenberg, President & Director, Capital Research and Management Co.; Thomas A. Russo, Vice Chairman, Chief Legal Officer, Lehman Brothers; Leonard Schaeffer, Founding Chairman, WellPoint Health Network; Peter Tufano, Sylvan C. Coleman Professor of Financial Management, Harvard Business School; and Luigi Zingales, Robert C. McCormack Professor of Entrepreneurship and Finance, University of Chicago Graduate School of Business. The committee’s study, “Capital Markets Regulation and Its Effects on U.S. Competitiveness,” will assess the degree to which U.S. public markets are losing ground to foreign and private markets, the causes of this decline, and its impact on the financial industry and the economy. In a November interim report the Committee will include recommendations on: 1. Liability issues affecting public companies and gatekeepers (such as auditors and directors) with a focus on securities class action litigation, criminal enforcement and federal versus state authority. Glenn Hubbard, co-chairman of the committee, said: “We believe that the unique structure and independence of the committee will enable it to evaluate thoroughly a broad range of economic issues affecting U.S. capital markets and make actionable recommendations to help keep the U.S. markets competitive with markets around the world.” The Committee’s other co-chairman, John L. Thornton said: “There are clear signs that global confidence in our capital markets has been diminished. It is very timely that we seek the creative thinking of some of our country’s leading academics and business professionals. We want to assure that a vibrant U.S. capital market continues to be part of the foundation of economic growth and job creation for all American businesses, both large and small.” Most of the members of the Committee will work on Task Forces to develop recommendations for the study. These Task Forces also include the following prominent academics and professionals specializing in law and finance: John Coffee, Adolf A. Berle Professor of Law, Columbia Law School; Allen Ferrell, Harvey Greenfield Professor of Securities Law, Harvard Law School; Kenneth Scott, Ralph M. Parsons Professor of Law and Business, Stanford Law School; Reinier Kraakman, Ezra Ripley Thayer Professor of Law, Harvard Law School; Andrew Kuritzkes, Managing Director, Mercer Oliver Wyman; Robert Litan, VP for Research and Policy, Kauffman Foundation; John Villa, Partner, Williams & Connolly. |
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