The Committee on Capital Markets Regulation (better known as the "Paulson Committee") issued an Interim Report (the "Report") on November 30, 2006, concluding that "the United States is losing its leading competitive position as compared to stock markets and financial centers abroad." This report was quickly followed by a study commissioned by New York Mayor Michael Bloomberg and Senator Charles Schumer and prepared by McKinsey & Co., which reached similar conclusions. At its July 2007 annual meeting the Financial Economists Roundtable (FER) discussed the issues raised by the Report and decided to issue its own report, which makes the following four policy recommendations. Members of the FER are senior financial economists at universities and other organizations recognized as having made significant contributions to the finance literature.

1) Securities class action suits -- Abolish enterprise liability under rule 10b-5 in situations arising out of security purchases and sales in the secondary trading market among outside shareholders, while retaining managerial and firm liability where the company itself or its insiders (officers and directors) transact to their own benefit. Imposing massive liability on a company that is not a party to the securities transactions and does not benefit from the fraud does not serve a targeted deterrence function because it is the continuing shareholders of the corporation who bear the burden of what the company must pay if found guilty, either directly or indirectly through insurance premiums. Public shareholders would as a whole be better off if there were no such liability. On the other hand, retaining liability for insiders and firms that either trade in the secondary market or transact to their own benefit requires the wrongdoers to make restitution and serves a significant deterrence function.

2) Shareholder rights -- Require all corporations to obtain shareholder approval to adopt a poison pill, regardless of whether a company has a staggered board. "Poison pills" are a prohibitive corporate defense against hostile takeovers and can prevent the removal of poorly performing boards and management through the market for corporate control. Requiring shareholder approval for the adoption of a poison pill would conform to the broad principle that the board of any company should not be able to deny its shareholders of the opportunity to decide on the merits of a takeover bid, and it would help restore the market for corporate control as an effective disciplinary mechanism for poorly performing boards and managers.

3) Compliance costs associated with SOX §404 -- Adopt a statutory amendment that makes it optional for a company to adopt the §404 procedures for a management assessment and auditor attestation of the effectiveness of its internal controls, with the requirement that if the company chooses not to comply it must explain why in its financial statements. §404 is highly controversial because of sharp disagreement about its relative costs and benefits. Costs are much higher than expected and benefits are difficult to identify and quantify. Consequently, the FER recommends that the market be allowed to determine the value of §404 compliance. If a company chooses not to comply, the market will assess its explanation for non-compliance and will value the company accordingly. Presumably, if non-compliance is viewed as a material reduction in the transparency or reliability of a company's financial statements, investors will put a lower value on a company that does not comply, providing an incentive for that company to meet §404 requirements if the expense is worthwhile.

4) Maintaining open markets -- Allow both foreign and U.S. firms to choose to report in conformity with either IFRS or US GAAP. The SEC requires all listed foreign corporations to report in conformity with Generally Accepted Accounting Principles (US GAAP), or to reconcile International Financial Reporting Standards (IFRS) with US GAAP if they use IFRS, as do many foreign-chartered corporations and all EU-based corporations. Consequently, foreign firms that list in the United States must bear significant additional reporting or reconciliation costs. The FER believes that both IFRS and US GAAP are high quality accounting standards that provide reasonable foundations for financial reporting for investors. Allowing both foreign and U.S. firms to adopt whichever of these standards they believe to be the most cost-effective provides an opportunity for the market and investors themselves to sort out which reporting standard best serves their interests.

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revised on October 24, 2000 by cpierso@luc.edu
http://www.luc.edu/orgs/finroundtable/members