The Committee of Corporate General Counsel of the ABA Business Law Section presented a program on March 16 that included a panel ("ABA Panel") entitled "New Commissions, New Recommendations: U.S. Capital Markets and Corporate Reforms." The panel discussed three reports containing recommendations to improve the competitiveness of U.S. capital markets and the institutions that use them, including Report and Recommendations of the Commission on the Regulation of U.S. Capital Markets in the 21st Century established by the U.S. Chamber of Commerce ("Chamber Report").
The Editor interviews Michael Ryan, a participant in the ABA Panel. During the past year, Mr. Ryan served as Executive Director of the Commission.
On April 9, Mr. Ryan was appointed senior vice president and executive director of the U.S. Chamber's Center for Capital Markets Competitiveness ("CCMC"), an initiative dedicated to making U.S. capital markets the most fair, efficient, transparent, and attractive in the world. Previous to serving as executive director of the Commission, Mr. Ryan was executive vice president and general counsel of the American Stock Exchange (AMEX). Before joining the AMEX in November 1998, he served as counsel to the chairman of the National Association of Securities Dealers and was a senior attorney at the U.S. Securities and Exchange Commission. Prior to law school, he was a senior accountant with Price Waterhouse.
The views of the interviewees do not necessarily represent the views of the Commission.
Editor: Mike, What was your role in the Chamber study?
Ryan: I served as Executive Director to the bipartisan, independent Commission on the Regulation of the U.S. Capital Markets in the 21st Century, which was launched by the U.S. Chamber of Commerce in February 2006.
The Commission was created to evaluate the current legal and regulatory framework of the U.S. capital markets and to recommend changes designed to ensure their continued heath and strength for decades to come. The Chamber asked the Commission to take a year to do high level thinking, talk to others, use their own experiences and look at data - and then to make recommendations for reform in areas where the Commission believed that the Chamber should consider getting involved.
The Commissioners are a cross-section of high-level, experienced and diverse individuals with expertise in various capacities in financial services businesses and the capital markets. I assisted the fourteen Commissioners by doing research and assembling their views as well as in putting the report together and overseeing the entire process.
During a year of study and discussion, the Commission conducted four public "town halls" in Chicago, New York, Washington, DC and San Francisco at which it received the views of many commentators, including academics, institutional investors, former regulators, venture capitalists, investment bankers, labor leaders, exchange officials and entrepreneurs. The commission also met formally and informally with current and former regulators and executive branch and Congressional officials.
Editor: How did the Commission decide which issues to address?
Ryan: At the Chamber, we had been hearing concerns expressed that our financial services businesses and capital markets were losing ground to foreign financial services businesses and capital markets. The Commission reviewed these concerns and evaluated the role the current legal and regulatory environment has been playing. It then considered changes to the U.S. legal and regulatory structure with a view toward improving our competitive position.
In going through its analysis, the Commission decided to focus on those areas of concern where the Commission could add the most value. While we spent some time talking about Sarbanes-Oxley and Section 404, we determined early on that these issues were getting a lot of media and Congressional attention and that the most pressing Sarbanes-Oxley issues were being addressed by the SEC and PCAOB. The Commission felt that there was not much more that it could add to that debate. The one SOX-related recommendation the Commission did make was to recommend that the SEC be given clear authority over Sarbanes by expressly providing that SOX is part of the Securities Exchange Act of 1934.
To accomplish its mission, the Commission broke itself into the following four working groups: U.S. Capital Markets in the Global Marketplace, Accumulated Savings and Investor Education, Challenges Confronting Issuers and Auditors and Challenges Confronting the Financial Services Industry.
Editor: What was the focus of the U.S. Capital Markets in the Global Marketplace group?
Ryan: It examined the shifts in capital markets activity over a 10 to 15 year period and attempted to make an assessment of the reasons for these changes and provide a foundation for many of the Commission's recommendations.1
Editor: What was the mission of the Accumulated Savings and Investor Protection group?
Ryan: It looked at issues concerning saving rates in the U.S., particularly in light of increases in life expectancy. With the Baby Boomers coming of age and life expectancy increasing, many people will be retiring without enough in savings to tide them through their retirement years.
There is a direct connection between retirement plans and the health of our capital markets. These markets cannot exist unless investors have assets to invest. The simple answer is that, if we collectively do a better job of encouraging saving, then people when they enter retirement will be a boost to our economy as opposed to a drain. If individuals are saving there is going to be a greater supply of investable assets. We want people in retirement to be a positive influence on our economy. We want them to travel and buy things and not be a drain, which will be the case if they cannot afford to support themselves.
To encourage saving the Commission made two key recommendations:
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Congress should adopt legislation further encouraging the establishment of tax-favored savings accounts for employees of companies with 21 or more employees that do not sponsor a retirement savings plan of any type. By making such a plan available on an automatic payroll deduction basis, the Commission believes that such plans will increase retirement savings and strengthen U.S. capital markets by growing the size and diversity of investment funds flowing into these markets.
Although employers would be permitted, but not required, to make employer contributions or to match employee contributions, their only obligation would be to make such a plan available and to collect and transmit employee contributions to a qualifying financial institution selected by the employer. Employees could opt out at any time.
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Congress should also encourage employers to sponsor retirement plans and enhance the portability of retirement accounts through introduction of a simpler consolidated 401(k) type program. The new plan would reduce the administrative and systems costs borne by employers in maintaining separate plan designs. If this were done, investments in defined contribution plans would be enhanced because more employers would be encouraged to offer the new 401(k) type plans. It would also enhance the portability of retirement plans for any employee who changes jobs. Editor: What recommendations did the Commission propose to meet the Challenges Confronting Issuers and Auditors?
Ryan: The third working group addressed Challenges Confronting Issuers and Auditors. It looked at the challenges confronting the audit profession and some issues regarding issuers.2
Two important recommendations related to ways to ensure the sustainability of the public company audit profession. The concern there is that there is a significant concentration of business in four firms that have very serious legal exposure, limited assets when compared to the litigation exposure and no ability to get meaningful insurance coverage. That creates the significant risk of one of these firms collapsing.
The Commission was also concerned about a culture of "short-termism" by U.S. companies and this group, therefore, recommended that companies stop the practice of issuing quarterly earnings guidance down to the penny; this was a somewhat unique recommendation because it was directed to public companies generally as opposed to a recommendation to be implemented by government.
Editor: The final group devoted itself to examining the Challenges Confronting the Financial Services Industry. What did this group do?
Ryan: It looked at the legal and regulatory framework affecting financial services companies. It concluded that there was a need for greater coordination and communication among regulators.
The Commission recommended that the President's Working Group on Financial Markets be assigned greater responsibility for coordinating the nation's financial services regulatory and supervisory policy and that the membership of the PWG, which is currently chaired by the Secretary of the Treasury and includes the chairs of the Fed, CFTC and SEC, be expanded and that it be provided with the resources necessary to discharge its new responsibilities. The ability of the UK's Financial Services Authority to act as a single integrated regulator of all financial activities is perceived by those outside the U.S. to be a superior model.3
The Commission also recommended that there be greater focus on how we connect to financial services businesses and capital markets around the world. If you go back five or 10 years ago the U.S. was the only game in town when it came to significant capital markets activities. If you were a Fortune 1000 company and wanted to raise meaningful capital, you had to come to the U.S.
Over the last decade Hong Kong and the UK have become more capable of supporting significant capital markets activities. They have the infrastructure and liquidity, and they have put in place mechanisms which provide for investor protection and improved corporate governance. Companies now have a choice of capital markets so the question is how we change our legal and regulatory framework to adapt to that changing reality.
The Commission believes that the SEC must be in the forefront of these developments. International harmonization of regulatory standards (including investor protection) is on the horizon, and the SEC must ensure that it is well-positioned to take a leadership role in helping to formulate those new standards. The Commission recommended that the SEC step up its profile as a global leader in addressing international developments and that one way to do this would be to vest the Division of International Affairs with Divisional authority, stature and - most importantly - resources such as more funding and staffing.
Editor: A number of the recommendations encourage foreign companies to list their shares here. Doesn't this benefit investors in the U.S.?
Ryan: Yes. Chinese companies, for example, will increasingly become household names - they may be the next Microsofts or Googles. It will be in the interest of U.S. shareholders to have access to those investment opportunities and not just for the particular investment opportunity but also for the diversification opportunities investing in foreign companies provides (for example, geopolitical and exchange rate diversity).
Given the rapid advances in financial services technology and the increasing demands of investors, new and inexpensive ways are being found every day to allow U.S. investors to invest in foreign listings. Whether regulators or policy makers like it or not, U.S. market participants - both issuers and investors - are increasingly going to participate in the global capital markets. The question then simply becomes, "How does our legal and regulatory structure respond?"
Editor: Was there coordination among the three groups that issued the reports?
Ryan: There was no formal coordination. Each group did their own thing and approached the process in their own way. And while there is some overlap and similarities, each took a different approach. Interestingly, though, I think if you take a step back you will find that we all came to the same basic conclusion global capital markets have undergone rapid and significant change in a relatively short period; the U.S. legal and regulatory framework was designed for one major capital markets center, not three; and now is the time to give serious consideration to what we want the framework to look like in the future, given the changed reality.
Editor: There are useful ideas in all three reports. Is there going to be any effort to sell these reports to the groups that need to make changes?
Ryan: The Chamber has asked me to run their new Center for Capital Markets Competitiveness. Working with those responsible for the CCMR and Bloomberg/Schumer Reports, the Center will put together an action-oriented agenda designed in essence to turn these reports into a new reality.
We have to convince Capitol Hill to a degree because the regulators are not going to make significant moves without a sense that Capitol Hill is on board. We will work closely with the SEC as well as, to the extent appropriate, the FTC, the banking regulators, DOJ and the President's Working Group. We plan to involve trade groups and the states as well as constituencies with different perspectives and interests. The Chamber's perspective is that these are important issues and complicated issues. There is a real opportunity for momentum here. At our launch event, Senator Dodd and Representative Frank were there. They are the chairs of the two committees with which the Center will be most involved. Based on their comments, it was clear that they listened intently to what was being said.
The three reports highlight that the world in which our capital markets exist has changed. The Center's ongoing mission will be to promote recognition that the ability of our capital markets to compete globally requires that appropriate changes be made in our regulatory system to reflect those changes. 1 Rick Murray's interview, on page 5. discusses the work of that group in greater detail.
2 See Chris Edward's front cover interview for further details about each of the recommendations discussed in this response.
3 See Rick Murray's interview on page 5.
Published May 1, 2007.