PRESS RELEASE ARCHIVE

Press Release 2/13/2009

COMMITTEE ON CAPITAL MARKETS REGULATION COMPLETES SURVEY REGARDING THE USE BY FOREIGN ISSUERS OF THE PRIVATE RULE 144A EQUITY MARKET

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The Committee on Capital Markets Regulation (“Committee”), an independent and nonpartisan research organization dedicated to improving the regulation of U.S. capital markets, has completed a survey regarding the explosive growth in the use by foreign issuers of the private Rule 144A equity market in the Unites States.  This growth is especially striking compared to the shrinking use by foreign companies of the U.S. public equity market, as documented by the Committee’s quarterly updates of the competitiveness of the U.S. public equity market.  Responses from counsel representing 17 of the 50 largest Rule 144A IPOs in 2007 identified five principal reasons for the growth in the private Rule 144A equity market: more developed home markets and increased liquidity outside the U.S.; the burdens imposed by the Sarbanes Oxley Act; the risk of securities class actions; compliance with U.S. GAAP; and increased liquidity in the Rule 144A market.    
                       
The Committee’s quarterly updates of the competitiveness of the U.S. public equity market (available at http://www.capmktsreg.org) have shown an explosive growth in the use by foreign issuers of the private Rule 144A equity market, peaking in 2006 before the financial crisis.  (Because the crisis has distorted equity and debt markets in 2008, we limit ourselves to data prior to 2008).  Unlike public U.S. equity markets, the Rule 144A market is not subject to SEC regulation of public offering rules under the ’33 Act nor to ongoing regulation under the ’34 Act (including the Sarbanes-Oxley Act).  Furthermore, the standard of liability for 144A offerings is lower than in the public market.  Moreover, because access to this market is restricted to large institutions, the incidence of securities class actions is significantly lower.

Increased use by foreign issuers of the private Rule 144A equity market is evident in both the initial IPO decision and the overall amount of equity raised by foreign issuers in the Rule 144A market relative to U.S. public markets.  

• Rule 144A IPOs by Foreign Companies

“Rule 144A IPOs”—IPOs by foreign companies listed outside their home country and privately offered in the U.S. pursuant to Rule 144A—account now for essentially all IPOs by foreign companies in the U.S.  From 1996 to 2006, 64.1% of global IPOs by foreign companies (by value) in the U.S. were Rule 144A IPOs.  By 2007, that figure had increased to 87.9%. 

• Rule 144A Equity Privately Raised by Foreign Issuers in the U.S.

The value of Rule 144A equity privately raised in the U.S. by foreign issuers via American Depositary Receipts (“ADRs”) issued by the principal depositary bank—Bank of New York Mellon—has increased dramatically.*  Averaging just $0.9 billion in the period from 2000 to 2005, total Rule 144A equity ADR issuance by BONY reached $9.9 billion in 2006 and was $4.5 billion in 2007.  These amounts, however, significantly understate total Rule 144A issuances because many foreign issuers now directly issue Rule 144A shares without using ADRs (consolidated data regarding these proceeds is not available). 

• Relative Size of the Private Rule 144A and Public Equity Markets

In the period from 2000 to 2005, we estimate that foreign issuers raised on average 6.8% as much equity via Rule 144A ADRs as they raised in the U.S. public market.  After spiking to 80.8% in 2006, the ratio declined to 24.0% in 2007.  Again, because the Rule 144A ADR figures do not include Rule 144A equity directly issued by foreign issuers, these figures significantly understate total Rule 144A issuances by foreign companies.**  Also, given the small amounts raised in either the public or 144A markets due to the credit crunch, current percentage shares probably are somewhat of anomaly.

While the data show an increased use by foreign issuers of the private U.S. Rule 144A market relative to the U.S. public markets leading up to 2006, the reasons for this dramatic switch in preference are not self-evident. 

To better understand the increased preference of foreign issuers for the Rule 144A market, we interviewed counsel to those foreign companies who had elected in 2007 to make an initial equity offering in the U.S. privately pursuant to Rule 144A, rather than publicly on an exchange.  We began by ranking the 50 top Rule 144A IPOs by foreign issuers in 2007 (by total offering value according to Dealogic).  Of those, Dealogic identified the issuer attorney for 42 of the offerings.  Of those 42 Rule 144A IPOs, we interviewed attorneys at 5 international law firms representing 17 of the largest Rule 144A IPOs. 

We asked the attorneys the following questions:

(1) Why did your client choose to raise equity outside of its home country?  
                       
(2) Did your client consider an initial public—as opposed to a Rule 144A—offering in the U.S.?

(3) What factors were important to your client in deciding to do a Rule 144A rather than a public equity offering in the U.S.?

Respondents consistently identified five principal reasons for their use of the private Rule 144A market in the U.S.***:

• Developed home markets and increased liquidity outside the US: It is no longer necessary to tap the U.S. public equity market if one wants to make a public offering.  Foreign issuers can get decent valuations at home, where local analyst cover is increasingly of high quality.  Further, there is increased liquidity in foreign secondary markets.  According to one respondent, “the US is no longer the only game in town.”  It is much easier now to do a public offering at home or in another country and then to tack on a Rule 144A private offering in the U.S.

• Sarbanes Oxley Act: A listing on the the U.S. public market is now seen as creating too much regulatory risk, and regulatory requirements are perceived as excessively burdensome.  According to one respondent: “A whole generation of dealmakers has grown up not having to deal with the SEC.”  Although a U.S. listing used to be a “vanity listing,” reflecting the U.S. imprimatur, the Enron and Worldcom scandals changed that, and the U.S. “halo effect” has all but disappeared.

• Risk of securities class actions:  The risk of securities class actions targeting public issuers was perceived as significant.  This was particularly the case with respect to Chinese issuers following the experience of China Life, which was sued in a securities class action shortly after its initial listing in 2003.  The litigation was traumatic for the Chinese government, and upper levels of government followed it closely, demanding detailed and up-to-date status reports.  Subsequent to China Life, Chinese state owned enterprises were advised by the government to think very seriously before pursuing a New York listing and SOE listings in New York dried up.

• Compliance with US GAAP: Reconciling international financial reporting standards with US GAAP was seen as burdensome.  This has now changed with SEC acceptance of IFRS without reconciliation, effective March 2008.

• Liquidity of Rule 144A market: Respondents pointed out that the market infrastructure for trading Rule 144A equity securities has dramatically improved, and has been particularly aided by the advent of new electronic trading platforms.

* BONY's market share of newly created Rule 144A ADR programs has averaged approximately 60% in the period from 2000 to 2007.

** Another reason this ratio may be lower than the percentage of Rule 144A IPOs is because it reflects all--not just initial--capital raisings; it may be that IPOs are more likely to be Rule 144A eligible.

*** Country specific responses included differences in home country versus U.S. accounting treatment for proven natural resource reserves.

Press Release 1/14/2009

COMMITTEE ON CAPITAL MARKETS REGULATION RELEASES RECOMMENDATIONS FOR REORGANIZING U.S. REGULATORY STRUCTURE

To read the full Committee Statement click here (PDF)

The Committee on Capital Markets Regulation, noting that the U.S. financial crisis has put the issue of financial regulatory structure on the front burner of public policy for the first time in decades, today released the following statement and recommendations for reorganizing the nation’s financial regulatory structure:

The crisis has made possible reforms on a scale not imaginable since the Great Depression.  Indeed, the severity of the crisis, the scope of the regulatory failures and the antiquated, patchwork design of the U.S. regulatory structure have given rise to a broad consensus regarding the need for sweeping regulatory reorganization. 

This consensus presents a historic opportunity to bring U.S. financial regulatory structure into the 21st century, ensuring our role as a global leader in financial markets.  Done properly, reform will restore market confidence, increase consumer and investor protection, improve regulatory quality, stimulate capital formation, enhance our ability to manage systemic risk and facilitate global policy coordination.

The Committee on Capital Markets Regulations believes there is enormous room to improve our regulatory structure.  The U.S. employs more financial regulators and expends a higher percentage of its gross domestic product on financial oversight than any other major country.  There are approximately 38,700 financial regulatory staff in the U.S., versus some 3,100 in the United Kingdom.  Meanwhile, financial regulatory costs in the U.S. total $497,984 per billion dollars of GDP, versus $276,655 in the United Kingdom.

Yet recent events suggest that the far larger staffs and greater funding in the U.S. have not resulted in a correspondingly higher quality of supervision.  The U.S. Treasury recognizes this, and issued its own bold recommendations, “Blueprint for a Modernized Financial Regulatory Structure,” in March 2008.

At its core, federal financial regulation performs four functions: providing a lender of last resort, supervising and regulating financial institutions for safety and soundness, regulating market structure and conduct and providing for consumer/investor protection.  Any regulatory structure must effectively perform these four functions.   Further, the Committee believes that the functions must be coordinated by the President through the office of the Secretary of the Treasury.  However, determining which part of the regulatory structure performs some or all of these functions is a more difficult challenge. 

The Committee’s recommendations address only revisions to U.S. federal regulatory structure.  The Committee may consider later whether to address the role of the states and self-regulating organizations (“SROs”), internal agency organization or global coordination.

The Committee is a non-partisan group 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 improve the regulation of the U.S. capital markets.

* In March, the Committee will release a new report—“Capital Markets Regulation After the Credit Crisis”—addressing key substantive regulatory issues.

Press Release 11/24/2008

CONTINUED EROSION IN U.S. PUBLIC EQUITY MARKET COMPETITIVENESS WAS AMONG THE FEW CLEAR TRENDS DURING Q3 MARKETS CHAOS

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The Committee on Capital Markets Regulation (Committee) said today that its latest quarterly update on the competitiveness of global capital markets found evidence of a continuing, significant decline in the attraction of the U.S. public equity market for foreign and American issuers alike. 

The latest analysis of competitiveness measures by the Committee was complicated by chaotic market conditions that distorted some of those measures.  Those factors included a steep decline in global IPO activity during this year’s first nine months – just 85 global IPOs (those done by foreign companies outside their home markets) valued at $20.4 billion compared with 335 worth $95.8 billion in all of 2007.  That is the biggest drop since the 2001-2003 period following the dotcom crash, when the aggregate value of global IPOs averaged just $10.4 billion annually.                

Hal S. Scott, the Harvard Law School professor who directs the work of the Committee, said: “Notwithstanding the extraordinary market conditions that skewed some usually reliable measures of competitiveness, significant further deterioration in U.S. public equity market competitiveness clearly stands out.”

He noted that U.S. IPO activity was even more anemic than global IPO activity during the first three quarters of this year, with only 33 IPOs, compared with 220 completed in all of 2007.  The 85 global IPOs completed in 2008 through the third quarter represent 25% of the full year 2007 total, while the 33 U.S. IPOs were just 15% of the 2007 total.

In other key conclusions, the Committee, an independent and nonpartisan research organization dedicated to improving the regulation and enhancing the competitiveness of U.S. capital markets, found that: 

• U.S. exchanges continue to lose their share of global IPOs.  From 1996 to 2006, U.S. stock exchanges attracted 28.7% (by value) of the IPOs done by foreign companies outside their home markets.  By 2007, that figure had fallen to 6.9%, and through Q3 of 2008, to 2.0%.

• None of the largest global IPOs are in the U.S. – for the second straight year.  In the 11-year period from 1996 to 2006, before it fell to zero in full year 2007, the U.S. had a 25% share of this market, with an average of five of the 20 largest global IPOs listed on a U.S. exchange.

• The number of IPOs that U.S. issuers list only abroad – a category all but unheard of a decade ago – has exploded.  In the seven-year period from 1996 to 2002, 0.3% of U.S. companies listed their IPOs only on foreign exchanges.  By 2007, that figure had jumped to 8.6%, and through Q3 of 2008 it rose sharply to more than 20% of all U.S. IPOs, or 7 of the 33 U.S. IPOs.

The Committee also found some usually reliable measures have been so distorted by market chaos this year that they currently are misleading.

Distorted measures favoring the U.S. public equity market in the latest quarter include total global market capitalization (38.7% vs. 32.8% in 2007) and the value of global share trading (52% in 2008 vs. 45% in 2007).  Both reflect the wave of sell-offs hitting smaller non-U.S. equity markets, leaving the U.S. public equity market still the world’s largest and most liquid even after the erosion in this decade.  The Committee recognized that a big drop in the percentage of New York Stock Exchange-listed foreign issuers who were seeking to delist their shares through Sept. 30 of this year (down to 5% from 15% in 2007) reflected a comparison problem.  (The year earlier delistings may have been stimulated by a then-recent liberalization of SEC delisting rules.)
 
Among distortions in the opposite direction, the Committee noted a rise in activity of foreign issuers doing Rule 144A IPOs in the U.S. during this year’s first nine months.  This rise (to about 95% of the value of global IPOs listed in the U.S. during the period, from 88% in 2007) may well reflect the near impossibility of getting IPOs done in the U.S. through much of the year more than an increasing aversion to the U.S. public equity markets. 

The Committee found that while its Q3 update data must be read in the context of the low IPO levels amid market turmoil, the competitive position of the U.S. does indeed continue to deteriorate from historical standards.  Without major reforms in shareholder litigation, the regulatory process and shareholder rights, these adverse trends will continue.

The Committee began tracking 13 separate measures of the competitiveness of U.S. capital markets on a quarterly basis in December 2007 with its report: “The Competitive Position of the U.S. Public Equity Market.”  The 13 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 Q3 2008 is now available on the Committee’s website at www.capmktsreg.org.

Press Release 9/3/2008

AMID PLUNGING IPO ACTIVITY IN 2008, CCMR FINDS THAT U.S. PUBLIC EQUITY MARKET COMPETITIVENESS CONTINUES ITS DECLINE

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The Committee on Capital Markets Regulation (“Committee”) today released its findings documenting the huge second quarter decline in IPO activity in the United States and foreign markets, a continuing reduction in the ability of U.S. markets to capture IPOs, and a failure by U.S. markets to list any of the largest IPOs in 2008.

To be sure, these findings, part of the Committee’s competitiveness update for the second quarter, underscore the savage impact of the credit crisis on U.S. markets. But they also once again showed the continuing deterioration in U.S. financial market competitiveness.

The Committee, an independent and nonpartisan research organization dedicated to improving the regulation and enhancing the competitiveness found that there were just 67 global IPOs by foreign companies in 2008 through Q2 valued in aggregate at $18.4 billion, compared with 335 in all of 2007 valued at $95.8 billion, the Committee said.

U.S. IPO activity was equally anemic.  Through this year’s second quarter, there were just 27 IPOs by U.S. companies, compared with 220 in all of 2007, the Committee added, indicating U.S. IPO activity in this year’s first half ran at less than a quarter of the year-earlier pace.
                       
Notwithstanding the extraordinary market conditions, five trends in 2008 stand out.

• Foreign issuers continue to rely heavily—and, now, almost exclusively—on the private Rule 144A equity market.  From 1996 to 2006, 64.1% of global IPOs by foreign companies (by value) in the U.S. were Rule 144A IPOs.  By 2007, that figure had increased to 87.9%.  In 2008 through Q2, it was an astounding 95.6%.

• U.S. exchanges are capturing a decreasing share of global IPOs.  From 1996 to 2006, 28.7% of IPOs by foreign companies outside their home market (by value) listed on a U.S. exchange.  By 2007, that figure had declined to 6.9%.  In 2008 through Q2, it was a trivial 1.7%.

• None of the largest global IPOs are in the U.S.  In 2008 through Q2, 0 of the top 20 global IPOs were listed on a U.S. exchange.  By contrast, in the eleven-year period from 1996 to 2006, on average, 5 of the 20 largest global IPOs were listed on a U.S. exchange.

• IPOs of U.S. companies listed only abroad—an unheard of phenomenon before 2007—increased in Q2 2008.  Through Q1, just 0.1% of U.S. IPOs by value—representing one of 12 U.S. IPOs—was listed only abroad.  Through Q2, however, that figure had increased to 2.2%, representing 6 of 27 U.S. IPOs.  In the seven-year period from 1996 to 2002, 0.0% of U.S. IPOs (by value) were listed only on foreign exchanges.

• Delistings by foreign companies from the New York Stock Exchange (“NYSE”) appear to have slowed.  From 1997 to 2006, the foreign delisting rate from the NYSE averaged 5.3%.  When in 2007 the rate spiked to 15.1% (representing delistings by 68 foreign companies), some believed this reflected pent-up demand in response to the SEC’s June 2007 easing of deregistration requirements.  Based on data through Q2, we project that 20 foreign companies will delist in 2008, representing a foreign delisting rate of 4.8%.  It is unclear whether this reduced rate reflects a return to pre-2007 levels following a release of pent-up demand in the second half of 2007 or the extraordinary market conditions prevailing in 2008.   

In summary, Q2 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 that the competitive position of the U.S. continues to deteriorate with respect to historical standards.  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 Q2 2008 is now available on the Committee’s website at www.capmktsreg.org.

Press Release 8/12/2008

COMMITTEE ON CAPITAL MARKETS REGULATION REPORTS ON COMPETITIVENESS OF THE U.S. DERIVATIVES MARKET

The Committee on Capital Markets Regulation (CCMR), an independent and nonpartisan research organization dedicated to improving the regulation of U.S. capital markets, has announced the results of research it commissioned by Professor Henry Hu of the University of Texas Law School and Darrell Duffie of Stanford University to study U.S. competitiveness in the global derivatives markets. 

The CCMR had issued its initial report on the competitiveness of the U.S. public equity market as an Interim Report in November 2006.  That report found that our public equity market was losing competitiveness with respect to private and foreign markets.  And the situation has continued to deteriorate, as shown in the Committee’s latest report for the first quarter of 2008 issued May 28, 2008. 

Now the CCMR has extended its competitiveness analysis to the derivatives markets.

Based on the research by Profs. Duffie and Hu, the CCMR finds that our markets for exchange-traded derivatives are far more competitive globally than are U.S. equity markets.  During 2007, the notional value of the year’s turnover of such instruments on North American exchanges far exceeded that on European exchanges – approximately $1,287 trillion here to approximately $792 trillion in Europe. 

The authors found that trading volumes at U.S. exchanges have been higher than those at European exchanges throughout the period 2001 to 2007.  In 2001, the turnover of exchange-traded futures and options was approximately $352 trillion in North America, compared with approximately $188 trillion in Europe; by 2007, the respective turnover in the two regions was $1,287 trillion and $792 trillion.  While the North American share has fallen slightly from about 59 to 56 percent during this period, the U.S. is still the dominant market.  The authors note that the Chicago Mercantile Exchange (CME), with its thriving interest-rate and stock index futures and options contracts, remains the world’s dominant derivatives exchange.  For those derivatives traded on the CME that are tracked by the World Federation of Exchanges, the CME in 2007 accounted for 53% of global trading (by notional value).

U.S. Competitiveness in OTC Derivatives Trading Less Clear 
With respect to OTC derivatives trading, Profs.  Duffie and Hu found the U.S. record is less clear.  During the period from 1998 to 2007, the U.S. has gradually increased its worldwide market share of trading in traditional OTC derivatives (which include currency and interest rate derivatives) from 19% in 1998 to 24% in 2007.  However, the U.S. does not appear to play as dominant a role in the markets for a number of categories of highly structured, higher margin derivative products, particularly structured equity derivatives – some of which markets have been particularly affected by the subprime crisis.

According to the researchers, a variety of factors may influence the location of derivatives trading activity.  These factors include the advantages associated with a regional concentration of customers and overall financial market activity, the size of the available pool of highly skilled workers needed for derivatives trading, the status of the dollar vis-à-vis the euro on currency markets, varying accounting standards here and abroad, and the relative tax burdens and costs of living.  A draft paper by Professors Duffie and Hu, based partly on their submission to the Committee, is available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1140869.

The Committee cannot but note that OTC derivatives trading – the weaker (but still viable) suit in the U.S.’s derivatives trading competitiveness – was, as a formal matter, substantially unregulated following the Commodity Futures Modernization Act of 2000 (CFMA).  Yet the Commodity Futures Trading Commission (CFTC) does continue to regulate exchange-traded derivative products – the derivatives trading sector where U.S. competitiveness is strongest. 

Historically the CFTC has followed a more principles-based approach to regulation than the SEC, a difference in approach that is embedded in the CFTC enabling legislation.  The CFMA amended the Commodity Exchange Act to replace the traditional “one-size fits all” regulatory framework with a risk-based model in which regulation is tailored to the nature of the market and its participants.  Under the CFTC’s approach, exchanges and clearinghouses must adhere to statutory “core principles” to the point that, with a few exceptions, there are no longer prescriptive regulations that dictate the exclusive means of compliance. The difference in approach between the CFTC and the SEC is further reflected in their different regulatory cultures.
The CCMR believes the distinct regulatory philosophy of the CFTC has contributed to the relative robustness of the U.S. exchange-traded derivatives market (versus the declining competitiveness of its equity trading, which takes places under a rules-based regulatory regime).  Indeed, in its “Blueprint for a Modernized Financial Regulatory Structure,” the Treasury lauded the CFTC’s “principles-based regulatory philosophy” in the context of its recommended merger of the CFTC and SEC. 

The CCMR, too, believes that the principles-based regulatory approach of the CFTC is an important factor in maintaining U.S. competitiveness in the derivatives markets.  If the CFTC were to be subsumed within the SEC and lose its distinct regulatory philosophy, U.S. competitiveness in these markets could be significantly and adversely affected. 

The Committee also notes, in addition, that the derivatives market is largely immune to securities class action lawsuits that overhang the public equities markets. 

The importance of a vibrant derivatives market in the U.S. cannot be understated.  As a general matter, access to a deep and rich set of derivative markets offers individual Americans, U.S. corporations, financial institutions and government entities valuable risk management opportunities.  An active and efficient U.S. derivatives market contributes to U.S. economic growth, the availability of high-quality jobs and the attractiveness of the U.S. as a venue for financial-market services.

About CCMR

Press Release 7/11/2008

COMMITTEE ON CAPITAL MARKETS REGULATION TO STUDY “FUNDAMENTAL ISSUES IN THE SECURITIZED DEBT MARKETS”

The Committee on Capital Markets Regulation (CCMR), an independent and nonpartisan research organization formed to improve the regulation of the U.S. capital markets, announced today a new study— “Fundamental Issues in the Securitized Debt Markets” —designed to produce recommendations to restore securitized debt markets devastated by the ongoing credit crisis. 

Hal Scott, the Committee’s Director and Nomura Professor at Harvard Law School, said: “The worsening state of the debt markets and the continued deterioration of the competitiveness of the U.S. equity markets, are a major concern.  Without stronger capital markets, full economic recovery in the U.S. will not be possible.”

The Committee’s recommendations will focus on five principal areas: transparency, consumer protection and borrower relief, capital requirements, regulatory reorganization and monetary policy (including issues raised by the Bear Stearns rescue).  The Committee will release its report in December prior to the new Administration taking office.

“Revitalization of the securitized debt markets, on a more prudent footing, is important to the ability of millions of Americans seeking credit to buy homes or automobiles,” said Professor Scott. “Further, it is crucial for spreading risk in the financial system.  The banking system would have been more devastated, and the credit crisis more intense, if banks had been unable to securitize mortgages or other form of consumer debt. Revitalization may indeed require more regulation—if so, we want to make sure it works, is consistent with other international initiatives and is cost-justified.”

The CCMR has created an Advisory Committee to oversee the research and recommendations, which will be chaired by Glenn Hubbard, Dean of Columbia Business School.  The Committee will be composed of several CCMR members as well as outside experts.  CCMR members include: Robert Glauber, Visiting Professor, Harvard University Kennedy School of Government and former Chairman and CEO, NASD; Blythe Masters, Head of Global Commodities, JP Morgan Investment Bank; Wilbur Ross, Chairman and CEO, WL Ross & Co. LLC; and Hal Scott.  Outside experts include: Peter Fisher, Co-Head of Fixed Income, BlackRock, Inc. and former Under Secretary of the U.S. Treasury for Domestic Finance; Boyce Greer, President of Fixed Income and Asset Allocation, Fidelity Investments; Robert Kaplan, Professor of Management Practice, Harvard Business School; John Rutherfurd, Retired Chairman and CEO, Moody’s Corporation; and Jeffrey Solomon, Managing Member, Ramius LLC.  The Advisory Committee will also be assisted by a panel of experts in law, finance and accounting.

The Committee on Capital Markets Regulation is an independent and nonpartisan 501(c)(3) research organization dedicated to improving the regulation of U.S. capital markets.  In November 2006, the Committee issued its Interim Report, which found a marked deterioration in the competitiveness of the U.S. public equity market and proposed 32 regulatory and other reforms to address the problem.

The Committee has also issued quarterly updates of these findings (available at www.capmktsreg.org), showing a continued deterioration in U.S. competitiveness.

Press Release 5/28/2008

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.
                       
Nonetheless, the continued deterioration of the competitive position of U.S. capital markets is evident, the Committee said.

It added that:

• While some of the 13 measures improved in Q1 2008 since 2007, all measures remain at historically low levels. 

• Foreign issuers continue to rely heavily—and, now, almost exclusively—on the private Rule 144A equity market.  From 1996 to 2006, 64.1% of global IPOs by foreign companies (by value) in the U.S. were Rule 144A IPOs.  By 2007, that figure had increased to 87.9%.  In Q1 2008, it was an astounding 95.6%.

• U.S. exchanges are capturing a decreasing share of global IPOs.  From 1996 to 2006, 28.7% of IPOs by foreign companies outside their home market (by value) listed on a U.S. exchange.  By 2007, that figure had declined to 6.9%.  In Q1 2008, it was 1.6%.

• Foreign companies continue to delist from the New York Stock Exchange (“NYSE”).  From 1997 to 2006, the foreign delisting rate from the NYSE averaged 5.3%.  When in 2007 the rate spiked to 15.1%, some believed this reflected pent-up demand in response to the SEC’s June 2007 easing of deregistration requirements.  However, the foreign delisting rate remained high in Q1 2008, at 11.4%, casting substantial doubt on the pent-up demand analysis.

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.

Press Release 4/4/2008

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.
*namely, the "three peaks" it contemplates (separate regulatory bodies charged with market stability oversight, prudential oversight and enforcement of market conduct rules), plus two other bodies that the Blueprint mentions (the Federal Deposit and Insurance Corporation and a new Corporate Finance Regulator).

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.

Press Release 3/26/2008

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
Listing Premiums for Many Companies

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:

• Of the 40 companies for which a compatriot set could be identified, the average U.S. premium of the delisting company was 17%. 
• For the 3 delisting companies from emerging markets, the average U.S. listing premium was 38%.
• For the 37 delisting companies from developed markets, the average U.S. listing premium was 15%.

   

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.

Press Release 12/12/2007

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.

Press Release 12/4/2007 

COMPETITIVENESS OF U.S. PUBLIC EQUITY MARKET STILL DECLINING

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. 
The Committee gathered data from stock exchanges, the World Federation of Exchanges, financial databases and market participants to compile 13 separate measures of competitiveness.  For each of those measures, the Committee went back to the mid-1990s, or, if later, as far back as a consistent time series would permit. 

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:

• Foreign companies delisting shares from U.S. exchanges increased from a dozen a decade ago, to 30 in 2006 and a record 56 already in the first 10 months of this year.
  
  
• In 1996, eight of the 20 largest global IPO’s were listed on a U.S. exchange.  That plunged to one in 2006, and for the first 10 months of 2007 not one of the top 20 listed here.
  
  
• The percentage of U.S. IPO’s listed only on a non-U.S. exchange (by value) increased from a miniscule 0.1% in 1996-2005 to 1.1% in 2006 and 4.3% through Sept., 30 of this year.

“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

COMMITTEE ON CAPITAL MARKETS REGULATION BACKS NYSE RULE CHANGE

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."

11/30/2006 Press Release

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.” 
 
Hal S. Scott, Nomura Professor and Director of International Financial Systems at Harvard Law School and Director of the Committee, added, “The Sarbanes-Oxley Act of 2002  helped restore market confidence after several high-profile scandals.  However, the cost of auditing internal controls is unnecessarily high and can be brought down.  The major problem is the cost of litigation, which can be addressed by resolving legal uncertainties and giving shareholders the right to choose more efficient ways to resolve disputes with their companies.  We will continue to explore these and other issues affecting the competitiveness of our capital markets for the next two years and we look forward to a lively public discussion.”

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:

• 5% of the value of global initial public offerings was raised in the U.S. last year, compared to 50% in 2000.
• The U.S. share of total equity capital raised in the world’s 10 top countries has declined to 27.9% so far this year from 41% in 1995.
• The decrease in U.S. listing premiums erodes the traditional edge maintained by the U.S. on cheaper cost of capital.
• Private equity firms, almost non-existent in 1980, sponsored more than $200 billion of capital commitments last year alone. 
• Since 2003, private equity fundraising in the U.S. has even exceeded net cash flows into mutual funds and going private transactions have accounted for more than a quarter of publicly announced takeovers.  The increased use of private markets disadvantages the average investor, who typically cannot participate in such markets.
• The dramatic increase in the use of private U.S. markets is important evidence that regulation and litigation are keeping them out of the public market.

Key Recommendations

Following are highlights of the Committee’s recommendations from each of the four areas of the report:

Shareholder Rights

• Classified boards should be required to obtain shareholder authorization to adopt a poison pill, and if this is not done within three months, the pill should automatically be redeemed.
• The Committee endorsed majority – rather than plurality – voting, which is a cornerstone of shareholder rights, and the Committee will study how it may best operate.
• Shareholders should be given the choice to decide how disputes with their companies should be resolved – through arbitration (with or without class actions) or non-jury trials. 
• The SEC should resolve issues on ballot access caused by a recent court decision.
  

Regulatory Process

• The SEC and self-regulatory organizations should move to a more risk-based regulatory process, emphasizing the costs and benefits of new rules.  In weighing the costs and benefits of new rules, regulators should rely on empirical evidence to the extent possible.  Also to the extent possible, regulations should rely on principles-based rules and guidance.  
• The SEC should periodically test existing rules to ensure they still meet reasonable cost/benefit standards.
• Public enforcement bodies like the SEC, Justice Department and state securities commissioners and attorneys general need to coordinate their activities, providing for federal precedence where enforcement implications are national in scope. There should be more effective communication and cooperation among federal regulators. The President’s Working Group on Financial Markets is one natural venue for ensuring such cooperation.

Public and Private Enforcement

• Greater clarity for private litigation under SEC Rule 10b-5, and from the SEC on materiality, scienter (knowledge of wrongdoing) and reliance is needed.  Criminal enforcement against companies should be a last resort, reserved for companies that have become criminal enterprises from top to bottom. We should not hold outside directors responsible for corporate malfeasance that they cannot possibly detect. 
• Public enforcement authorities should not be allowed to threaten corporate defendants with denial of their employees’ right to due process.
• The SEC should protect outside board members against liability from relying in good faith on the validity of audited financial statements – otherwise, it will be difficult to attract independent directors to boards.
• Congress should explore protecting audit firms against catastrophic loss through the provision of caps or safe harbors, as do some European countries and as the European Union is actively considering.  Any use of such protection must be balanced against stiff action against those responsible for misconduct.

Sarbanes-Oxley

• The SEC should adopt a more reasonable materiality standard both for internal controls and financial statements.
• The SEC and the PCAOB should adopt enhanced guidance on auditors’ roles and duties in testing for compliance with Section 404.
• If a revised Section 404 is too burdensome for small companies ($75 million market cap and less), even after the general reforms outline above are implemented, the SEC should recommend to Congress that small companies be exempt from auditor attestation and be subject to a more reasonable standard for management certification.

9/12/2006 Press Release

NEW INDEPENDENT NON-PARTISAN COMMITTEE TO STUDY CAPITAL MARKETS REGULATION AND MAKE RECOMMENDATIONS TO KEY POLICY MAKERS

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.
2. The Sarbanes-Oxley Act, with major emphasis on Section 404, which requires auditors and senior managers to certify the adequacy of internal controls.
3. Overall regulatory processes to allow the United States to do a better job of evaluating changes of law and regulation, prospectively, initially and on an ongoing basis.
4. Shareholder rights.

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.”

Professor Scott added: “We are witnessing a crucial moment in economic history--the movement of U.S. capital markets abroad, and the growth of private markets at the expense of public ones.  The United States needs to adopt a more principled and risk-based approach to regulation.  With the support of eminent academics and finance professionals across the country, I am confident that the Committee will contribute valuable input for specific action by key policy makers.”

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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