An independent and influential US group reported last week on the growing unattractiveness of the USA as a source of global capital and made recommendations. The Committee on Capital Markets Regulation is composed of corporate and financial leaders from the investor community, business, finance, law, accounting, and academia, and represents both of the US’s political parties. It was created last September to investigate ways to maintain and improve the competitiveness of the US capital markets. This interim report focuses on equity capital markets.
The Committee noted the decrease in foreign equity placements and the preference for foreign markets such as London or for the private raising of capital. This trend was now being followed by US companies. Whilst accepting the increase in competitive markets with large pools of available capital and improved technology, the conclusion was that the cost of regulatory compliance and the high risk of liabilities - Sarbanes-Oxley requirements, shareholder and government litigation, and aggressive US regulators - were major criteria in this movement of global capital.
However, the Committee did not suggest the removal of Sarbanes-Oxley or a lessening of the overall US regulatory environment, rather it recommended a principles-based approach to Sarbanes-Oxley implementation, a risk-based approach to the enforcement processes, better enforcement of shareholders' rights, and a more balanced application of civil and criminal law to corporate matters.
Specific detailed recommendations were: the reduction of the barriers which prevent a foreign company which has raised capital in the US from ever deregistering from US markets; that regulators should carry out a detailed cost benefit analysis for any new rules that they write; and that regulators should differentiate in the protection of wholesale/professional market users in comparison to retail clients. There was also the recommendation for increased cooperation between federal and state regulators, between the many US regulators and with their international counterparts. The report concludes with a detailed analysis of Section 404 of Sarbanes-Oxley and concrete recommendations as to its interpretation and implementation.
Many of the recommendations are what politicians and regulators in both the EU and the UK have been advocating. It remains to be seen what effect this report will have on a government preparing itself for an election.
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