A 'Shadow' Critique of Competitiveness, Futures
February 26, 2007
Major
financial institutions and marketplaces, trade association leaders
and government officials have weighed in on the question of whether
the weight of securities regulations is hindering the global
competitiveness of U.S. capital markets. The private-sector
Committee on Capital Markets Regulation has been especially vocal
in this regard, expressing alarm about declines in new U.S. stock
exchange listings as well as enforcement and litigation costs. The
latter aspect of the issue was the focus of a paper this month from
the Shadow Financial Regulatory Committee, a largely academic
advisory panel sponsored by the American Enterprise Institute
(AEI). "The Competitiveness of U.S. Securities Markets" was
principally authored by George Benston of Emory University, Kenneth
E. Scott of Stanford University Law School and AEI's Peter J.
Wallison. Following the slightly edited text of that statement
below is a second document released Feb. 12, "The Proposed Merger
of Principal U.S. Futures Exchanges," by Shadow committee members
Edward J. Kane of Boston College and Charles Calomiris of Columbia
University. Although the proposed linkages parallel those employed
in trading equities, the performance risks that futures exchanges
confront are of an order of magnitude larger.Within the last few months, two widely publicized reports have suggested that excessive regulation and litigation in the United States are causing financial transactions that used to take place in the U.S. to move to foreign markets, particularly London. The Interim Report of the Committee on Capital Markets Regulation, a group of respected financial executives and academics, and another report by New York Mayor Michael Bloomberg and New York Sen. Charles Schumer both concluded that regulatory and litigation reform was necessary to create a more hospitable environment for financial transactions in the U.S.
The Shadow Financial Regulatory Committee does not believe that the issue should be framed narrowly as a question of where financial transactions should take place. The committee believes that the increasing maturity of securities and capital markets in other countries and the globalization of financial transactions are something to applaud. The fact that foreign markets are competing with ours is a good development and will benefit both our markets and U.S. companies.
Still, the rapid decline in listings on U.S. exchanges, the growth in privatizations by U.S. companies, the expansion of private equity funds, and the fact that foreign companies are coming to the U.S. to raise funds privately but not publicly, all suggest that something is wrong. Excessive regulation and large and arbitrary litigation risks appear to be hindering this country's ability to compete. The right balance of regulation and enforcement enhances investor confidence and makes our markets attractive; when regulation and litigation risk get out of balance, they impose unwarranted costs on American investors and reduce the attractiveness of our capital markets.
The two recent reports are comprehensive, addressing many factors that affect the attractiveness of U.S. markets. The Committee on Capital Markets, for example, covered U.S. international competitiveness, shareholder rights, SEC regulatory policies, Section 404 of the Sarbanes-Oxley Act, and enforcement of the securities laws. The Bloomberg-Schumer report was also comprehensive. In this statement, however, the Shadow committee will focus on only one of these issues--the litigation risk faced by public companies. We believe that exposure to unpredictable and expensive litigation is one of the key reasons that foreign companies are reluctant to enter the U.S. public markets and that U.S. companies are finding that the costs of being a public company outweighs the benefits.
