The interim report from the Committee on Capital Markets Regulation has drawn mixed reviews.

The Securities Industry and Financial Markets Association welcomed the committee’s report and called it, “a constructive contribution to the discussion about ensuring that markets and industry are globally competitive”.

“This report draws opinions from some of the most respected and sophisticated men and women involved in the capital markets today,” said Micah Green, co-CEO of SIFMA. “The bi-partisan study group, which includes members of the business, academia and the investor community, among others, has provided a host of important recommendations which should be seriously reviewed and considered by U.S. policymakers.”

“The report makes a number of constructive contributions regarding the regulatory process which could dramatically improve the efficiency and competitiveness of our markets,” said Marc Lackritz, co-CEO of SIFMA. “The report calls for the SEC and self-regulatory organizations to create more risk-based and principles-based rules and to improve cost-benefit analysis of proposed and existing rules, objectives that the securities industry fully endorses, especially after our study this year which showed the industry’s compliance costs doubled from 2002 to 2005.”

However, the Council of Institutional Investors said that it disagrees strongly with the committee’s assertion that overzealous regulation is stifling U.S. competitiveness. “We also believe that many of the panel’s recommendations, if adopted, would undermine the effectiveness of market watchdogs and weaken critical investor protections,” it added.

It commended the committee for acknowledging the importance of shareowner rights and recognizing that the U.S. capital markets need to strengthen these rights. “While we support the committee’s recommendations in this area, we think that further steps should be taken to safeguard shareowner rights,” it said.

Council members and other investors shoulder the costs of legal and regulatory inefficiencies, it noted. But they also suffer when rules fail to protect investors. “We support efforts to address market inefficiencies, so long as they do not put investors at risk,” says Ann Yerger, the Council’s executive director.

The council agrees that the SEC and the Public Company Accounting Oversight Board should ensure that Section 404 of the Sarbanes-Oxley Act is implemented in a way that is risk-based and cost-effective. “We applaud their current efforts to achieve these goals. We are optimistic that the SEC and the PCAOB will fix the implementation problems with Section 404, and confident that there will be no need to exempt the smallest U.S. publicly traded companies,” it said.

“While the committee raises legitimate questions about the level of regulation and litigation, we think it views these issues through far too narrow a prism, by focusing primarily on the market for initial public offerings,” it said. “IPOs, while a key source of revenue for Wall Street investment bankers, are not the sole, nor the best, basis on which to judge the health of the U.S. economy or the appropriateness of U.S. rules and laws. And the committee’s contention that fear of lawsuits and excessive regulation, particularly costs associated with Section 404, have driven the decline in IPO listings is off-base. The U.S. share of the IPO market peaked a decade ago, long before Sarbanes-Oxley and other post-Enron reforms.”

Several factors have contributed to the erosion of U.S. dominance of the global IPO market, including: privatization of state-owned enterprises in emerging markets; high U.S. investment banking fees relative to underwriting fees on European exchanges; and, growing globalization, which has increased the sophistication of emerging markets.

The amount of money raised by foreign companies in U.S. IPOs has grown since Sarbanes-Oxley was enacted in the wake of a shocking series of corporate scandals, it noted. “In the first eight months of 2006, it hit $5.8 billion, the highest level since 2000. Rigorous U.S. investor protections are a boon, not a bust, for our capital markets,” it said.