Steps needed to make our U.S. capital markets more competitive
Despite sustained economic growth and the creation of 7 million new jobs since 2003, the competitiveness of the United States economy is facing a serious challenge from markets overseas. Certainly, America remains the world’s premier economic superpower, but gone are the days when capital would blindly flow to Wall Street-and from there to every sector of our national economy. The success of our financial markets is essential to America’s long-term economic prosperity, sustained economic growth and the creation of quality jobs. The GDP of the financial services industry, the third-largest sector of the U.S. economy, topped $1 trillion in 2005, and represented 8.1 percent of total U.S. GDP and 5 percent of total private sector employment.
A decline in U.S. economic competitiveness would have a significant negative impact on our national economy. One recent study predicted an annual loss of $30 billion in revenue from the financial services sector alone over the next five years, along with the 30,000 to 60,000 domestic jobs this money would have created.
In addition, the report states that capital markets in European and Asian economies may have significantly more room to grow than in the U.S., due to lower capital markets penetration-debt and equity financing compared with GDP.
The increased competitiveness of overseas markets is due, in part, to their own maturation and human innovation. Foreign markets, using the United States as a model, have enhanced their transparency, stability and liquidity in recent years. For example, London’s Big Bang reforms in 1986 laid the groundwork for its rise as a financial powerhouse. Many other overseas markets have followed.On the heels of this reform movement came a technological revolution that, along with a reduction of trade barriers, produced a globalized marketplace that eliminated barriers to the movement of capital.
As a result, businesses now have choices. Their natural and historical attraction to the liquidity of U.S. markets has given way to broader considerations.
That helps explain why companies have been increasingly turning to the markets in London, Hong Kong and Dubai in recent years. For instance, 96 percent of the largest global IPOs, a leading indicator of market competitiveness, were issued in foreign markets in 2005. That same year, only 10 percent of all global IPOs chose to list on the NYSE, compared with 37 percent five years earlier. London’s market share has jumped to nearly 25 percent during that same period.
The United States cannot control the evolution of overseas markets or their ability to compete in a global marketplace, nor should it want to. A growing global market offers expanded opportunities for American businesses and investors.But we must adapt to these changing circumstances to maintain our competitive advantage. Unfortunately, in the areas of regulatory burden and litigation risk, we have been slow to act or, worse, created more complex and costly systems.
In the United States, new regulatory requirements-most notably the implementation of the Sarbanes-Oxley Act (SOX)-have contributed to a climate that encourages companies to explore the foreign and private equity markets.
The increased risk of liability, including government and shareholder litigation, has also spurred corporations and investors to consider the overseas markets. The number of securities-related class-action settlements-as well as their total dollar value-set a record in 2005. No one argues that the courts remain essential to protecting investors who have been wronged. However, an unpredictable legal system impedes businesses’ ability to adequately manage legal risk, leading to risk-averse behavior and undue costs that dampen growth.
Not surprisingly, capital raised in the private equity markets is now more than 10 times greater than in the public markets in the United States.
The key to reclaiming our competitive advantage does not lie in the wholesale elimination of regulations and litigation. On the contrary, we must create a more predictable legal environment that offers comprehensive protection for investors, and we must establish effective regulation that instills confidence in the market without dimming innovation and progress.
Improving the regulatory agencies is central to improving the regulatory environment. That is why I introduced legislation in 2005 to make structural and procedural improvements to the Securities and Exchange Commission. Among other things, my bill sought to merge the policy-making and examination divisions of the agency to enhance communication and to ensure the costs of compliance for registered firms were consistent with the risks posed to investors.
The legislation was intended to spark debate on the need for reform. To its credit, the SEC implemented recommendations contained in the bill less than six months later, creating the possibility of more comprehensive reforms in the years ahead.
Other areas in which we can take immediate action to begin reclaiming our economic competitiveness include:
Enhanced Communication: While the regulatory agencies are staffed with decent, hardworking individuals who believe in a robust marketplace, we can enhance communication between the regulators and the regulated to help reduce companies’ fears that interaction-including how-to questions about compliance-will result in an examination or investigation. The SEC should consider moving toward more prudential regulation that will foster an open-door policy to clarify regulatory requirements and explore new, innovative products.
Further, we should improve inter-regulator communication by establishing universal, overarching principles to guide financial regulators in the rulemaking process. This would provide additional certainty in the regulatory environment and increase information sharing, reducing the possibility of systemic risk. Inherent in these principles should be a thorough cost-benefit analysis of new rules and regulations.
Principles-Based Rules: We should consider the benefits of moving away from the prescriptive rules-based system that currently governs corporate behavior and government enforcement.
This one-size-fits-all approach fails to acknowledge the uniqueness of individual companies and prohibits them from developing their own internal systems to meet the highest standards of conduct. A principles-based system like those employed in many overseas markets would offer greater flexibility, lower compliance costs and increased competition.
SOX Implementation Reform: The implementation of SOX has veered from Congress’ intent. Using the recent guidance of the Securities and Exchange Commission and Public Company Accounting Oversight Board as sound footing, we can make necessary modifications in implementation to reduce costs, including ways to define and evaluate materiality.
Litigation Reform: While we need to ensure enforcement of all laws and regulations to discourage illegal behavior, improvements can be made to both the public and private systems. The emphasis must remain on bringing to justice those who violate the law-not on destroying entire companies staffed by individuals innocent of wrongdoing.
The United States must re-establish our nation’s capital markets as the destination of choice for investors and companies. The good news is that this slide in economic competitiveness can be reversed with bold action from policy makers at all levels of government.
Vito Fossella (R-NY) represents Staten Island and parts of Brooklyn.
