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 Richard H. Murray, a participant in the ABA panel and Executive Vice President and Chief Claims Strategist, Swiss Re, and one of fourteen Commissioners of the U.S. Chamber's Capital Markets Commission ("Commission").
Mr. Murray is well qualified to address the issues discussed in his interview. In addition to his responsibilities at Swiss Re, he serves on the supervisory board of the Centre for the Study of Financial Innovation, on the advisory board of Oxford Analytica and on the advisory board of the Northeast Business Law Center. In addition to serving on the Commission, he is also a member of the Institute for Law Reform and Global Forum Shopping Task Force, also organized by the U.S. Chamber of Commerce and a member of the Republican Presidential Roundtable. He served as chairman of the Professional Responsibility Committee of the large global accountancy firms, 1999-2002; a member of Lloyd's (London), 1989-1994; the British Insurance Association (London), 1989-1994; the Risk and Insurance Management Society (U.S.), 1985-1989; a Task Force Member of the Group of Thirty (Washington, DC), 1994 and 1996; and director, executive committee, and lecturer at the Institute of Management Development (Lausanne, Switzerland).
The views of the interviewees do not necessarily represent the views of the Commission.
Editor: Rick, to what extent did the Commission in formulating its recommendations take into account the international perspective?
Murray: The Commission established four separate working groups: U.S. Capital Markets in the Global Marketplace, Accumulated Savings and Investor Protection, Challenges Confronting Issuers and Auditors, and Challenges Confronting the Financial Services Industry. Although the last three had a specific U.S.-centric orientation, it was against the backdrop of maintaining the competitiveness of U.S. financial services and capital markets in an increasingly competitive global marketplace. Chris Edwards led the U.S. regulatory system review.
The U.S. Capital Markets in the Global Marketplace group which I led set out to determine whether the best interests of U.S. capital markets would be best served by maintaining a strong nationalistic orientation to our decisions. Early in the process, we concluded that we had to work in a more collaborative fashion with other financial centers in the world in order to remain competitive.
Editor: What was your role in the development of the Commission's recommendations?
Murray: My focus was on understanding how the U.S. capital markets and its legal and regulatory environment are viewed outside the U.S. and to assess how much influence those perceptions had in drawing capital market activity away from here.
The relatively recent creation in the UK of the Financial Services Authority as a single integrated regulator of all financial activities is viewed outside the U.S. as a superior model of how regulators and the regulated should relate to each other. The FSA approaches the regulatory process with an exploratory approach to issues. They consult with the regulated industries.
The perception in Europe is that, in order to influence behavior, the SEC relies less on guidance based on consulting to develop facts and motivations and more on unleashing its enforcement machinery. The issue is whether you begin with dialogue and consultation on what should be done or whether you wait to see what behaviors emerge and punish those that you do not like.
Editor: Would you comment on the regulatory environment in the U.S.?
Murray: There are two separate issues in this area. One is a perception outside the U.S. that we are overregulated because, unlike the situation in the UK, there are multiple regulators that influence our capital markets' behavior. In addition to the federal agencies, state controls of auditing, insurance, securities and other aspects of our capital markets contribute to a maze of regulations. This is seen as complex and multilayered to the point of being perceived as a daunting task.
A closely related, but substantively different perception is that, beyond the layers of regulation, there is a uniquely difficult arms-length relationship between the regulator and the regulated industry. In many of the European and Asian countries the regulatory interface is built on a more clearly understood platform of mutual objectives. The best illustration in the U.S. is the relationship between the Office of the Comptroller of the Currency and the banking industry. There is a good deal of inspection and enforcement, but it operates under the assumption that the mission of the Federal Reserve Board is to foster the health of the banking industry. The perception of the SEC abroad is that it tends to take a more detached view of its responsibilities to the securities industry.
Editor: How important is it to replicate the role of the bank examiners?
Murray: There are some practical ways to better align the regulator and the regulated entities. Having a privileged ability to share information back and forth without a fear that the information will be handed over to plaintiffs' counsel would be a step in the right direction. Congress should pass legislation granting a privilege with respect to the SEC similar to the examiners' privilege that exists for banking regulators.
Editor:What are the advantages of a principle-based approach to regulation?
Murray: The SEC puts the burden on those entering the U.S. to make their best judgments and then hope that regulators do not disagree with them. A principles-based approach would result in more initial dialogue between regulators and actors to determine what course of conduct is permissible and would lend itself to more predictability than the current U.S. system.
Editor: What are some of the other reasons why foreign issuers may not wish to register or sell their securities in the U.S.?
Murray: The cost of converting a set of financial statements from IFRS to GAAP to register in the U.S. is a significant concern. Use of GAAP and meeting other SEC disclosure requirements also affects internal accounting control systems and information management. Also, when you elect to register or sell securities in the U.S., you subject yourself to U.S. securities laws.
The foreign perspective is that the U.S. system is too unpredictable. For instance, when looking at a rule like Section 10b-5, the language is simple, but it is difficult to understand what the rule is intended to accomplish. The combination of that Section's simplicity and the extreme variety of ways in which it is applied by courts to impose liability is a fairly daunting prospect to someone outside the U.S. They are used to operating in a system where guiding principles are written in an easy to understand manner so that those affected can determine what is required.
Editor: Is exposure to criminal liability also of concern to foreign businesses wishing to sell securities or do business in the U.S.?
Murray: People abroad are still unnerved by the Arthur Andersen situation and the possibility of an indictment of a highly respected firm. The extradition by the U.S. of the three officers from NatWest Bank who had participated in one of the Enron structured finance transactions has also raised concerns in Europe.
In the UK, the idea that a participant in U.S. capital market transactions would be subject to U.S. criminal laws and extradition was a shocking event, particularly from the perspective of UK capital markets where crime is rarely viewed as a relevant aspect of commercial activities. People abroad assume that those engaged in commercial transactions may be subject to fines or penalties, but that criminal sanctions will be applied only in extreme cases. The NatWest episode indicates that you only need to be associated with a deceptive practice to have potential criminal liability.
Editor: What about the recommendation to remove quarterly earnings guidance?
Murray: Outside the U.S. quarterly earnings forecasting is a rarity. Inside the U.S. it has, with few exceptions, become the practice. The fact that this is voluntary is not entirely understood outside the U.S. However, it conveys the impression that the U.S. is short term oriented in terms of measuring business success. From the European perspective where the perspective is longer term, there is a sense that if you get involved in the U.S. markets there will be pressure to focus more on the quarterly than on annual results.
Acceptance by most companies of the Commission's recommendation to remove the focus on quarterly earnings would certainly reduce the perception of short-termism in U.S. capital markets. It would also provide a rationale for moving away from the practice without raising the perception that a company has something to hide. That is why we recommended a voluntary system where companies could provide earnings guidance on a yearly basis, although that guidance should be in the form of a range of numbers rather than a fixed figure.
Editor: Would you comment on the Commission's recommendations with respect to the accounting profession in the U.S.?
Murray: The Big Four accounting firms are global organizations that depend on their viability in the countries where they operate. For the last decades, the large audit firms are organizations comprised of independently owned national practices in over 100 countries.
There is a fear arising out of the Arthur Andersen case that an accounting firm's U.S. practice is more vulnerable to being destroyed by indictment or litigation than its international offices. That vulnerability is of concern to their colleagues overseas and the large global clients that are served by their foreign branches.
Businesses (including accounting firms) should be indicted only under very special circumstances - and after taking into account injury to innocent stakeholders. The Chamber Report recommended changes in the Thompson and McNulty Memos that would reduce the potential for corporate or audit firm indictments at the federal level.
The recommendation of a national charter for accounting firms was directed toward concern about the effect of a state criminal or regulatory action on the ability of an accounting firm to do business in a state. Outside the U.S., it is important to set at rest worries about attorneys general such as Elliot Spitzer who rely on unique state laws that are more severe than federal laws to go after businesses. There is great concern abroad that there are too many people in the U.S with the ability to raise havoc.
Editor: You seem to feel that fear of overregulation, excessive litigation and possible criminalization all blend together to discourage doing business here. What actions do you suggest that Congress take to address these concerns?
Murray: We recommended that Congress mandate the SEC to conduct a comprehensive study of whether or not the various forms of criminal, regulatory and civil penalties that can be imposed on capital market participants have the right balance of protection versus the health of the markets. Only if this assessment is made and appropriate actions taken, can we hope to convince the world that our environment is not hostile to business.
Published May 1, 2007.