As expected, the report of the Committee on Capital Market Regulation issued today is calling for represents arguably the most high-profile effort to date to present in the public forum the case that excessive business regulation — much of it an overreaction to the corporate scandals of the post-stock market bubble period earlier this decade — is stifling public securities markets and causing the U.S. markets to lose business to foreign competitors. A copy of the 148-page report can be downloaded here.
Most notably, as Larry Ribstein explains in more detail here, the report suggests that the premium for listing on both United States and a foreign market for foreign companies has dropped dramatically since 2002. Shares of a foreign company are generally worth more if they are listed both on U.S. markets as well as their home markets because — at least in theory — investors will pay more for the stock due to the additional confidence provided under the United States regulatory system. The report finds that the cross-listing premium has declined for companies also listed in countries with sophisticated markets and less onerous corporate governance controls, such as Hong Kong, Japan, and England, and that the premium has remained steady or increased only in regard to companies cross-listing from countries with questionable controls, such as Italy, Brazil and Turkey. Thus, the clear implication is that the U.S. is losing its previous competitive edge in securities markets to countries with sophisticated securities markets and less onerous corporate governance regulations.
The committee is directed by Harvard law professor Hal Scott and is co-chaired by former White House adviser Glenn Hubbard, now dean of Columbia University’s business school, and John Thornton, former president at Goldman Sachs Group Inc. and now chairman of the Brookings Institution. Treasury Secretary Henry Paulson is expected to welcome the report as he is already publicly advocating many of its recommendations and recently called for a broad re-examination of business regulations and laws.
The report’s theme is that a change in regulatory philosophy is necessary to preserve the viability of U.S. securities markets. The revised philosophy is one based more on general principles than rules, similar to England’s Financial Services Authority, which uses principles-based regulation and oversees all British financial firms, in comparison with the U.S.’s web of federal and state banking and securities regulators. The report recommends generally that the SEC act more like federal banking regulators and concentrate more on the underlying soundness of the financial markets and less on individual acts of wrongdoing “with less publicity surrounding enforcement actions,” a clear jab at the public relations campaigns that prosecutors have mounted over the past several years to demonize businesspersons.
The report makes 32 specific recommendations, six or which pertain to easing the application of Section 404 of the Sarbanes-Oxley Act governing internal company-financial controls that are absurdly expensive for most businesses to implement. Other recommendations call for setting a higher bar for regulators or private litigants to sue outside auditors, independent directors and company employees, and also recommends that Congress cap auditors’ liabilities.