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Atkins Weighs In On U.S. Financial Competitiveness

Recent studies on the competitiveness of the U.S. capital markets have stimulated a national and a global discussion about whether the U.S. is losing its competitive edge, according to SEC Commissioner Paul Atkins. In remarks at a conference cosponsored by the American Enterprise Institute and the Brookings Institution, Atkins said that securities regulators should be acutely aware of the costs that regulations impose on the markets. These costs are cumulative, he said, and it may take years before the aggregate costs become significant. Atkins' speech is available on the SEC's Web site.

Atkins said that a competitive regulatory environment should achieve results/benefits in proportion to its costs. He questioned whether the SEC has layered rule after rule upon the capital markets in response to various scandals without considering the cumulative impact of the regulations.

Atkins also addressed the importance of economic studies in determining the need for new regulations. One of the SEC's recent proposals would require a person to have at least $2.5 million in investments to invest in a private investment fund, like a hedge fund or a private equity fund. Atkins explained that the underlying premise is that these types of investments are too risky for individuals other than the very rich. The premise suggests that the non-rich are not sophisticated, or lack access to sophistication, or that it is intolerable for the non-rich to risk losing their money, he said. He questioned the basis for concluding that these funds are the most risky.

Atkins reported numerous comment letters in which individuals were unhappy with the SEC's attempt to determine their level of risk tolerance and financial sophistication. The proposal may prevent the non-rich from losing their money in private investment funds, Atkins said, but it will also prevent them from participating in any upside profits and gains.

Atkins noted that the "smart money" investors are increasingly investing in private investment funds. If these large sophisticated institutional investors are willing to pay the higher than average expenses associated with these investments, Atkins said he could only surmise that they have determined that private equity managers will be able to achieve superior returns.

The studies raised a number of issues that are important to U.S. competitiveness, including the matter of excessive litigation. The reports urge a reexamination of the U.S. private securities litigation laws. Atkins said the bigger issue is abusive class actions that result in little benefit to the class members but large cash fees for the plaintiffs' attorneys. He believes the key is to quickly separate the cases with merit from those lacking merit in a timely and cost-efficient manner.

Atkins said one of the most interesting recommendations in the Chamber of Commerce report relates to earnings guidance and the desire to meet Wall Street expectations. The SEC cannot do much on this point, he said, but he urged the business and investor communities to follow up on industry practices with respect to the Chamber's recommendation. Atkins said he has seen far too many cases in which company executives falsified financial statements and other disclosure in order to meet Wall Street expectations.

Atkins supports a recommendation to make securities enforcement among the states and the federal government more uniform. The SEC has not engaged in a serious effort to bring about regulatory convergence among federal and state securities regulators, in his view.

Another recommendation relates to staff guidance in the form of accounting bulletins, legal bulletins, speeches and no-action letters. These forms of guidance are not subject to the Administrative Procedures Act so are not subject to public comment. Atkins said he has no problem with the staff attempting to explain or help companies apply an SEC rule or an accounting standard. Guidance can be issued quickly and can be helpful in unique circumstances. His concern is when a staff pronouncement changes existing market practices, as he believes occurred with Staff Accounting Bulletin No. 101.

Atkins said he also appreciated the recommendations in the reports that addressed the appropriate relationship between the SEC and its regulated entities. Since the Office of Compliance Inspections and Examinations became a stand-alone office, Atkins said the level of interaction and communication with the former supervisors at the line divisions has been "less than optimal." He sees this as an operational issue, rather than a structural issue. He said the SEC should use a prudential model of regulation in which OCIE is instrumental in communicating best practices and heading off potential problems.