SEC must learn to play nice with other regulators, U.S. economist says

(September 9, 2003) The U.S. must stop pretending to hold a monopoly on the securities industry and adopt mutual recognition of foreign regulators, according to one of America’s leading international economists.

“There is a stark dichotomy between the way America invests and the way America governs,” says Dr. Benn Steil, André Meyer senior fellow in international economics and director of international economics at the Council on Foreign Relations in New York. “If you look at American investors, it’s quite clear that America is going global, but if you look at the regulatory side, it governs like the globe is going American.”

Dr. Steil delivered the keynote address at the Canadian Foundation for Investor Education (CFIE) conference “Competitive Governance in a Global Market” yesterday.

He says the U.S. Securities and Exchange Commission (SEC) continues to hand out regulations as if the rest of the world needs — or wants — its guidance. Meanwhile, it appears that American investors themselves are not interested in what the regulator has to say.

R elated Stories

Canada should think twice about Sarbanes-Oxley, experts say Synchronizing accounting principles globally on top accountant’s agenda Passport model gaining momentum in regulatory reform race

“U.S. investors increasingly go outside of the U.S. to invest in foreign markets, whereas the perspective of the SEC is that when foreigners want to raise capital, they come to the United States,” Steil says. “That’s not only naive, but dangerous.”

In the past, foreign firms wanting to tap into America’s well of capital would list American depository receipts (ADRs) on U.S. exchanges, because barriers imposed by regulators made it too expensive to invest in the foreign listings. It has since become much cheaper.

American institutional investors have lost their appetite for ADRs and now invest in the underlying stock on its home market because it is more liquid. Steil says that many fund managers will not even consider buying an ADR unless the client has specific rules forbidding him from holding foreign listings.

Steil says American regulations, such as the Sarbanes-Oxley Act, have discouraged foreign firms from listing in the U.S., reducing American regulatory influence. He cites the example of Vivendi, which had to prove to a U.S. court that it was not an “American” company. The firm gathered data on its shareholder base and discovered that while over 20% of shareholders were American, only 8.9% of the holdings were ADRs on U.S. markets. The rest of the holdings were listed in Paris.

Part of America’s problem with foreign firms is the difference in accounting practices. While the SEC demands all firms listed on U.S. markets file their reports using the generally accepted accounting principles (GAAP), almost every other country follows the international accounting standards (IAS).

IAS is even preferred by U.S. institutional investors over GAAP for foreign firms because GAAP is built around the U.S. tax code and U.S. law. It makes no sense for a German firm to release its earnings using GAAP, because these rules force it to take into consideration taxes that are simply not applicable.

The U.S. policy against mutual recognition is actually reducing accountability, says Steil, leaving the investor with less protection. With mutual recognition, a European exchange could sign up a U.S. broker-dealer as a direct member of the exchange. A retail investor could then trade through the U.S. broker, who would have a fiduciary duty to the investor.

Steil says mutual recognition is the only feasible approach to globalization of the securities industry, since a complete convergence of regulation could never be agreed upon.

---

What do you think? Do regulators treat investors like children? Is the SEC out of touch with the nature of global investing? Does this all sound a little like the Passport Model? Share your thoughts about this topic in the Talvest Town Hall on Advisor.ca.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca

(09/09/03)

Steven Lamb