The U.S Committee on Capital Markets Regulation today issued a report calling for a raft of changes designed to improve the competitiveness of U.S. equity markets.
“As an overall matter, the committee concludes that the solution to the competitive problem of U.S. capital markets lies, on the one hand, in reducing the burden of litigation and regulation and, on the other hand, in increasing shareholder rights.”
The independent, bipartisan committee composed of 22 corporate and financial leaders was convened on September 12, to explore a range of issues related to maintaining and improving the competitiveness of the U.S. capital markets. It says that it believes that “the shift of regulatory intensity balance has been lost to the competitive disadvantage of U.S. financial markets.”
However, it doesn’t call for a wholesale relaxation of regulations. “To make a reduction of regulatory intensity an end in itself would be self-defeating. Investors and companies raising capital participate in markets where they feel safe by virtue of effective laws and rules vigorously enforced by knowledgeable, transparent courts and even-handed, vigilant regulators.”
“A regulatory ‘race to the bottom’ will serve no useful competitive purpose,” it says. “What is needed is the proper balance among mechanisms that protect investors — regulatory laws and rules, the activities of the courts and regulators, shareholder voting rights — and the cost, burden, and intrusion that these mechanisms inevitably impose on firms and individuals that participate in the capital markets.”
The report examines four areas where the committee believes adjustments need to be made to prevent a further erosion of the competitive position of U.S. capital markets: regulatory process, the private and public enforcement system, shareholder rights, and the implementation of Sarbanes-Oxley.
It recommends that the SEC and self-regulatory organizations should engage in a more risk-based process, focused explicitly on the costs and benefits of regulation, and that regulations should rely on principles-based rules and guidance, rather than the current regime of detailed prescriptive rules. It also recommends better coordination among national regulators and between federal and state authorities.
The committee says that it supports continued civil and, where justified, criminal enforcement against individual wrongdoers, including CEOs “with whom the buck should stop”. However, it notes reforms are necessary, including that the private litigation system needs modification and that the criminal enforcement system needs better balance.
The report finds that there is a danger that the U.S., compared with other countries, is falling behind best practices in shareholder rights. It says that shareholders should be given the right to approve poison pills in companies with staggered boards, it favours majority voting requirements, it calls on the SEC to address appropriate access by shareholders to the director nomination process, and says that shareholders should have the right, if they choose, to adopt alternatives to traditional litigation by instituting alternative dispute resolution mechanisms such as arbitration.
The report recommends no statutory changes in the Sarbanes-Oxley Act, including Section 404. “Investors have benefited from the stronger internal controls, greater transparency, and elevated accountability that have resulted from this new law,” it says. “However, we do believe that the implementation of SOX 404 by the SEC and the PCAOB, together with the prospect of catastrophic liability faced by auditors, has produced a regime that is overly expensive. The same benefits can be produced at lower cost.”
It concludes that there need to be changes to SOX 404 implementation, including a redefinition of materiality, more guidance from the PCAOB, and multi-year rotational testing permitted within an annual attestation.
“The committee hopes that the analysis and recommendations in this report will influence public policy affecting the competitiveness of capital markets,” it says. “Due to the importance of these issues, we recommend that the president direct his Working Group on Financial Markets to examine the legal and regulatory concerns we raise and to propose whatever reforms it views necessary and appropriate.”
The committee intends this report to be the first of its evaluations of the legal and regulatory underpinnings of U.S. public capital markets. Future reports may evaluate the competitiveness of mutual fund and derivative markets, measures to avoid “short-termism,” and further issues related to shareholder rights.
U.S. panel seeks to reduce burden of litigation
Warns of danger in falling behind best practices in shareholder rights
- By: James Langton
- November 30, 2006 November 30, 2006
- 12:55