[Senate Hearing 110-925]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-925

 
         A GLOBAL VIEW: EXAMINING CROSS-BORDER EXCHANGE MERGERS

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                SECURITIES AND INSURANCE AND INVESTMENT

                                 OF THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   ON

CURRENT TRENDS IN CAPITAL MARKETS AND EXCHANGES, INCLUDING MERGERS AND 
 ACQUISITIONS, AND PRECIPITATING FACTORS; AND THE IMPACT SUCH CHANGES 
         HAVE ON REGULATION, MARKET PARTICIPANTS, AND INVESTORS


                               __________

                        THURSDAY, JULY 12, 2007

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate /
                            senate05sh.html


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania        ELIZABETH DOLE, North Carolina
JON TESTER, Montana                  MEL MARTINEZ, Florida

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel
                    Justin Daly, Republican Counsel
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                         George Whittle, Editor

                                 ------                                

        Subcommittee on Securities and Insurance and Investment

                   JACK REED, Rhode Island, Chairman
                 WAYNE ALLARD, Colorado, Ranking Member
ROBERT MENENDEZ, New Jersey          MICHAEL B. ENZI, Wyoming
TIM JOHNSON, South Dakota            JOHN E. SUNUNU, New Hampshire
CHARLES E. SCHUMER, New York         ROBERT F. BENNETT, Utah
EVAN BAYH, Indiana                   CHUCK HAGEL, Nebraska
ROBERT P. CASEY, Pennsylvania        JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
JON TESTER, Montana

                     Didem Nisanci, Staff Director
              Tewana Wilkerson, Republican Staff Director


                            C O N T E N T S

                              ----------                              

                        THURSDAY, JULY 12, 2007

                                                                   Page

Opening statement of Chairman Reed...............................     1

Opening statements, comments, or prepared statements of:
    Senator Allard...............................................     3
    Senator Crapo................................................     4

                               WITNESSES

Erik Sirri, Director of the Division of Market Regulation, 
  Securities and Exchange Commission.............................     5
    Prepared statement...........................................    37
Ethiopis Tafara, Director of the Office of International Affairs, 
  Securities and Exchange Commission.............................     7
    Prepared statement...........................................    37
Noreen Culhane, Executive Vice President of the Global Corporate 
  Client Group, NYSE Euronext....................................    18
    Prepared statement...........................................    42
    Response to written questions of:
        Senator Reed.............................................   122
Adena Friedman, Executive Vice President of Corporate Strategy, 
  NASDAQ Stock Market............................................    20
    Prepared statement...........................................    57
Allen Ferrell, Greenfield Professor of Securities Law, Harvard 
  Law School.....................................................    21
    Prepared statement...........................................    67
Damon Silvers, Associate General Counsel, AFL-CIO................    23
    Prepared statement...........................................    84


         A GLOBAL VIEW: EXAMINING CROSS-BORDER EXCHANGE MERGERS

                              ----------                              


                        THURSDAY, JULY 12, 2007

                                       U.S. Senate,
     Subcommittee on Securities, Insurance, and Investment,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 9:59 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Jack Reed (Chairman of the 
Subcommittee) presiding.

            OPENING STATEMENT OF CHAIRMAN JACK REED

    Chairman Reed. Good morning, let me call the hearing to 
order.
    I want to thank Senator Allard, my colleague, for joining 
me this morning. We are looking at the issue of A Global View: 
Examining Cross-Border Exchange Mergers.
    Globalization has led us to a crossroads. The world economy 
is developing a variety of factors including increased 
liquidity and improved regulatory structures by drawing both 
firms and investors to emerging markets. Furthermore, as 
technological obstacles to cross-border trading disappear and 
markets are increasingly dominated by hedge funds and 
institutional investors with appetites for international 
investments, exchanges seek a global presence to remain viable.
    In an effort to preserve and improve their positions, 
exchanges are engaging in increased cross-border transactions 
through mergers and acquisitions of other exchanges. In light 
of this growing trend, we are here to examine the impact on 
market participants, investors, and the regulatory scheme.
    The New York Stock Exchange, for example, has merged with 
Paris-based Euronext, forming a strategic alliance, also with 
the Tokyo Stock Exchange, and has invested in a 5 percent stake 
in India's National Stock Exchange.
    NASDAQ acquired an increased stake in the London Stock 
Exchange before announcing it would merge with the Nordic 
exchange OMX.
    These trends are not only confined to domestic markets, as 
the German-based Deutsche Bourse has announced its intent to 
buy the U.S.-based International Securities Exchange.
    The increased alliance between exchanges has led to an 
increased interaction amongst regulators. In the United States, 
both the SEC and CFTC are engaged in cross-border conversations 
with regulators in Europe, China, Japan, and Australia, among 
others. Additionally, the International Organization of 
Securities Commissions, IOSCO, has announced that by 2010 its 
108 members must sign on to a memorandum of understanding that 
seeks to enable regulators to cooperate on enforcement in a 
timely, seamless manner.
    In recent months the SEC has been prioritizing a number of 
regulatory reforms focused on providing foreign entities 
greater access to the U.S. securities markets. For example, the 
SEC is considering eliminating the need for non-U.S. companies 
to reconcile to U.S. Generally Accepted Accounting Principles. 
While this effort might ease the filing requirements on non-
U.S. companies, some argue that the integrity of the 
International Financial Reporting Standards, the alternative 
filing, is not on par with and may, in fact, be dependent upon 
reconciliation to U.S. GAAP.
    Additionally, the SEC is looking at a move to mutual 
recognition with foreign regulators with substantially 
comparable regulatory regimes and is examining whether foreign 
exchanges could place their screens with U.S. brokers in the 
United States without multiple registrations.
    However, it is important that these efforts provide 
comparable safeguards for investors. And in considering such 
approaches, we must ensure that while the rulebooks may be 
similar on paper, their interpretation and enforcement by other 
regulators must be equally comparable.
    The globalization of markets across product lines, as well 
as geographic boundaries, through increasingly sophisticated 
trading in multiple markets and multiple currencies and other 
complex transactions, significantly raises the potential to 
obscure illegal activities and avoid timely detection. In an 
effort to move forward with the times, the integrity and trust 
in the regulation of the U.S. exchanges, which has contributed 
so greatly to their success, cannot be compromised.
    Today it is necessary to ensure that investors are 
sufficiently informed and protected in a new global 
marketplace. Regulators have historically focused on protecting 
domestic investors. In a global economy regulators must take a 
broader view. For example, the U.S. regulatory regime is 
designed to protect retail investors while many foreign 
regulatory regimes focus largely on wholesale and institutional 
investors. Thus, the ability of the regulators to meet their 
mandates of protecting investors while ensuring vibrant capital 
markets cannot be secured in the same manner across borders.
    The role exchanges play in economic development, capital 
formation, job creation, innovation, cannot be ignored and we 
have a national interest in ensuring their continued vitality.
    It is noteworthy that as local stock markets grow more 
liquid and well-regulated, 90 percent of the world's countries 
chose to list in their primary markets. For example, in 2006 18 
of the global top 20 IPOs went public on domestic exchanges. In 
this regard, U.S. markets remain competitive as the most 
liquid, transparent, and capitalized in the world with the 
deepest retail base and solid institutions that protect 
investors.
    In 2006, the U.S. launched the highest number of IPOs, 187, 
in the world and U.S. companies raised $34.4 billion in 
capital, second only to Chinese firms.
    The hearing today is an opportunity to evaluate the current 
situation and get a full picture of the implications of these 
actions on the future of exchanges, as well as market 
participants, investors and regulators alike.
    I want to thank the witnesses beforehand for their presence 
and for their testimony.
    At this juncture, I would like to recognize Senator Allard 
for any comments he might have.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. First of all, Mr. Chairman, I would like to 
congratulate you on starting this Committee hearing 1 minute 
before it was scheduled to start. Usually around here things 
start late and it is a rarity when you start a meeting on time. 
But to start it ahead of time, that is just unheard-of.
    Chairman Reed. I think it is a function of spending my 
youth standing at attention.
    Senator Allard. West Point graduate here.
    I also want to thank you, Mr. Chairman, for holding this 
hearing of the Security Subcommittee to examine cross-border 
exchange mergers.
    Over recent years, I have seen tremendous shifts in the 
capital markets. For many years, U.S. markets were the only 
place for investors to go. Today the U.S. markets remain the 
deepest and most liquid in the world but we are facing more 
competition from foreign markets. Capital is more mobile than 
ever and hedge funds, mutual funds, pension funds, and other 
investors are looking at markets around the globe both to find 
opportunities and to diversify their investments.
    In response, exchanges also begin to look abroad for 
opportunities. As a result, we have seen a number of cross-
border exchange mergers. The New York Stock Exchange merger 
with Euronext will create the world's largest exchange network. 
NASDAQ is merging with OMX, Europe's fifth-largest exchange. 
And NASDAQ has shown interest in a merger with the London Stock 
Exchange. According to the exchanges, these mergers have the 
potential to offer wider products and services to investors, 
lower fees, and offer more global services.
    While these services have the potential to offer a number 
of benefits to investors, they also present challenges to both 
the exchanges as well as the regulators. Issues like the 
convergence of accounting standards, audit standards, mutual 
recognition and enforcement will present some complex matters. 
In considering how to better promote U.S. competitiveness 
globally, it is important to maintain strong investor 
protection and to not disadvantage U.S. firms.
    So I would like to thank all of our witnesses for being 
here today as we examine these matters. The witnesses have a 
great deal of expertise in these most complex issues, and I am 
certain that they will help the Subcommittee gain a better 
understanding of the causes and implications of the cross-
border exchange mergers.
    I do apologize in advance that I will not be able to stay 
here for the entire hearing but it is not because of a lack of 
interest. I am very, very interested in what is going on among 
the exchanges and our security markets and future markets and 
obviously will look closely at your testimony and be following 
these issues very, very closely.
    Again, I would like to thank all of our witnesses and thank 
you, Mr. Chairman, for bringing up this important topic on the 
securities markets.
    Chairman Reed. Thank you very much, Senator Allard.
    Senator Crapo.

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman.
    I do not have an opening statement to make other than to 
say that I appreciate your holding this hearing. I am very 
interested in not only the dynamics that we are going to be 
looking at here with regard to cross-border exchange mergers, 
but also just the competitiveness globally of the United States 
and capital markets in general and what we can learn with 
regard to what is happening or what we can help to develop in 
terms of making the United States and helping the United States 
continue to be the strongest market in the world
    Chairman Reed. Thank you Senator Crapo.
    Now I would like to introduce the first panel prior to 
their testimony.
    Mr. Erik Sirri is the Director of Market Regulation at the 
Securities and Exchange Commission. In this role he is 
responsible to the Commission for the administration of all 
matters relating to the regulation of stock and option 
exchanges, national securities associations, brokers, dealers, 
and clearing agencies.
    He is currently on leave from Babson College where he is a 
Professor of Finance. From 1996 to 1999, Mr. Sirri served as 
the Chief Economist of the Securities and Exchange Commission.
    Mr. Sirri received his BS in Astronomy from the California 
Institute of Technology, an MBA from the University of 
California, Irvine, and his Ph.D. in finance from the 
University of California, Los Angeles. We have had the 
privilege of Mr. Sirri's testimony before. Thank you again for 
joining us, very much.
    Mr. Ethiopis Tafara is the Director of the Office of 
International Affairs of the Securities and Exchange 
Commission. In this capacity, Mr. Tafara advises the Commission 
and senior staff on international legal and policy issues and 
also represents the Commission with foreign policymakers, 
foreign regulators, and international institutions on issues 
relating to securities regulation.
    Prior to joining the SEC, Mr. Tafara served in several 
capacities at the Commodities Futures Trading Commission, 
including counsel to Chairperson Born and Acting Chief Counsel 
in the Division of Enforcement.
    In addition to extensive Government service, he was a 
lecturer at the European Business School in Brussels and a 
partner in P&T Consultants in Brussels. He began his legal 
career at the Brussels office of Cleary, Gottlieb, Steen & 
Hamilton.
    Mr. Tafara received a JD from Georgetown University Law 
Center in 1989 and earned an AB from Princeton University in 
1985.
    Thank you very much for joining us Mr. Tafara.
    Mr. Sirri, please begin.

  STATEMENT OF ERIK SIRRI, DIRECTOR OF THE DIVISION OF MARKET 
              REGULATION, SECURITIES AND EXCHANGE 
                           COMMISSION

    Mr. Sirri. Chairman Reed, Ranking Member Allard, and 
members of the Subcommittee, thank you for the invitation to 
testify today about the recent trend of cross-border mergers 
and their impact on the markets, on investors, and on 
regulation. These developments present both new challenges and 
opportunities for U.S. securities markets and the SEC.
    As markets have evolved, innovations in technology have 
eliminated many of the physical barriers to market access, with 
the result that exchanges worldwide have pursued alliances and 
mergers in order to more effectively participate in the global 
exchange business.
    For example, in February of this year the New York Stock 
Exchange Group and Euronext merged their business under a U.S. 
holding company, NYSE Euronext. In addition, NASDAQ acquired a 
substantial minority interest in the London Stock Exchange, and 
recently announced an agreement to buy the Nordic stock 
exchange operator OMX. Further, Eurex, the European derivatives 
exchange, has agreed to acquire the U.S.-based ISE.
    I believe a number of factors have precipitated the recent 
trend of cross-border exchange combinations. In recent years, 
most of the U.S. exchanges have demutualized. As a result, many 
U.S. exchanges have had access to new sources of capital and 
the means to consider mergers that would expand their business 
globally.
    In addition, the demand for global trading opportunities 
has grown as more and more investors, both large and small, 
have begun to look abroad for investment opportunities.
    Today, for example, nearly two-thirds of all U.S. equity 
investors hold foreign equities through ownership of individual 
stock in foreign companies or ownership of international or 
global mutual funds.
    And finally, developments in technology and reduced 
communication costs have driven markets to become largely 
electronic, with the result that geographic boundaries have 
become much less relevant. This, of course, has made it easier 
and less expensive for investors to conduct cross-border 
securities activities.
    To date, the regulatory issues faced by the SEC regarding 
cross-border exchange mergers have been relatively modest as 
the proposed transactions involving U.S. exchanges preserve 
their separate operation under a holding company structure. 
With the NYSE/Euronext, for example, the NYSE Group and the 
Euronext markets continue to operate separate liquidity pools 
in their respective jurisdictions.
    The creation of a single holding company for these markets, 
in and of itself, does not raise substantial U.S. regulatory 
issues. Over time, however, I expect the global exchange groups 
will seek to further integrate their markets, whether through a 
consolidation of technology platforms, the provision of trading 
screens in each others jurisdictions, or the linking of their 
liquidity pools.
    Depending on the scope of this integration, a wide range of 
core U.S. regulatory issues could be implicated, including 
those surrounding exchange regulation, broker-dealer 
registration and listed company registration.
    Global exchange initiatives such as these may very well 
promote competition and the efficiency of cross-border capital 
flows and thus have the potential to benefit markets and 
investors in the U.S. and abroad.
    The core of the SEC's mission is to protect as investors, 
maintain fair and orderly markets, efficient markets, and to 
facilitate capital formation. As we approach these difficult 
global regulatory issues, we must be vigilant that U.S. 
investors are not left open or vulnerable to an inadequate 
disclosure or oversight requirement that puts them at an 
inappropriate risk.
    Unquestionably, however, there is more that we can do to 
reduce cost and frictions of obtaining foreign securities 
within the U.S. without jeopardizing the protection of U.S. 
investors. In fact, we hope to work cooperatively with foreign 
regulators to raise standards for investors in all of our 
markets.
    As you may know, the SEC has begun exploring the merits of 
a mutual recognition approach to facilitate global market 
access. Just last month we hosted a Roundtable on Mutual 
Recognition, where distinguished representatives of U.S. and 
foreign exchanges, global and regional broker-dealers, retail 
and institutional investors, and others shared their views on 
the possibility of mutual recognition.
    Although the details of a viable mutual recognition 
approach are still in the early stages of development, in 
essence it would permit foreign exchanges and broker-dealers to 
provide services and access to U.S. investors, subject to 
certain conditions, under an abbreviated registration system. 
This approach would depend on these entities being supervised 
in a foreign jurisdiction that provides substantially 
comparable oversight to that that is in the U.S.
    Mutual recognition would consider what circumstances 
foreign exchanges could be permitted to place trading screens 
with U.S. broker-dealers in the U.S. without full registration. 
Mutual recognition would also consider under what circumstances 
could foreign broker-dealers that are subject to an applicable 
foreign jurisdiction's regulatory standards be permitted to 
have increased access to U.S. investors without the need for 
intermediation by a U.S. registered broker-dealer. While this 
approach could reduce frictions associated with cross-border 
access, it would not address the significantly greater 
custodial and settlement costs that are incurred today when 
trading in foreign markets.
    Given that the key focus of our mission is to protect U.S. 
investors, maintain fair and orderly markets, maintain 
efficient markets, and to facilitate capital formation, these 
exemptions from registration would depend on whether the 
foreign exchange or the foreign broker-dealer are subject to 
comprehensive and effective regulation in their home 
jurisdictions. To make this determination, the SEC would need 
to undertake a detailed examination of the foreign 
jurisdiction's regulatory regime, consider whether it has 
adequately addressed issues such as investor protection, fair 
markets, fraud, manipulation, insider trading, registration 
qualification, trade surveillance, sales practice standards, 
financial responsibility standards, and dispute resolution.
    Such a challenging undertaking would be necessary to 
fulfill our obligation to protect investors, maintain fair and 
orderly markets, and facilitate capital formation.
    Other requirements or limitations could also be 
appropriate. For example, any exemptions permitting mutual 
recognition should be limited, at least to start, to trading 
foreign securities so as to address concerns about the impact 
of this approach on the U.S. market activities. Similarly, 
exemptions could be limited to trading with market 
professionals and certain large sophisticated investors who 
could be expected to more fully appreciate the significance of 
directly trading with foreign markets and intermediaries.
    Finally, this approach could also require the home 
jurisdiction of the foreign exchange and the foreign broker-
dealer to provide reciprocal treatment to U.S. exchanges and 
U.S. broker-dealers seeking to conduct business in that 
country.
    At the direction of Chairman Cox the SEC staff is 
developing a proposal regarding mutual recognition for SEC 
consideration as early as this fall.
    I am grateful for the opportunity to provide you with this 
overview of the recent trend of cross-border exchange mergers 
and other related regulatory issues and I look forward to 
answering your questions.
    Thank you.
    Chairman Reed. Thank you very much, Mr. Sirri.
    Mr. Tafara, your comments please?

    STATEMENT OF ETHIOPIS TAFARA, DIRECTOR OF THE OFFICE OF 
   INTERNATIONAL AFFAIRS, SECURITIES AND EXCHANGE COMMISSION

    Mr. Tafara. Chairman Reed, Ranking Member Allard, and 
distinguished members of the Subcommittee, thank you for 
inviting me to provide my personal views on the emerging 
regulatory issues in the world's globalizing securities 
markets.
    It is, of course, no surprise to anyone that the world 
stock markets are becoming increasingly global in their 
operations and their outlook. I understand that today's hearing 
is being held partly as a result of the recent series of 
mergers of U.S. stock exchanges with foreign counterparts 
leading to the theoretical, if not currently actual, 
possibility of a truly global trading platform.
    Yet exchange mergers are only one aspect of the 
globalization of our capital markets. Indeed, in some respects, 
recent and proposed mergers stock exchanges such as the New 
York Stock Exchange and Euronext are a response to much broader 
market changes brought about by increasingly mobile investors, 
issuers and investment firms.
    Today, technology makes it possible for even a novice to 
execute a cross-border trade via computer terminal. Indeed, 
from a purely technological perspective, there often is no 
difference between conducting a transaction on a domestic or a 
foreign market.
    While the traditional trading floor might require an actual 
human being to be physically present in New York or Chicago to 
execute an order, an electronic network can allow an order to 
be executed from a computer terminal placed pretty much 
anywhere in the world. In short, like capital, exchanges have 
become entirely mobile.
    By technological changes offer us only a partial picture of 
the vast changes that have occurred to our markets over the 
past several years. Following World War II, widespread 
prosperity returned to the United States and this prosperity 
led to a large number of average citizens having sufficient 
savings to invest directly in the stock markets.
    Yet during this period, most Americans invested entirely or 
almost entirely in U.S. stocks that were traded on U.S. 
markets. Recent data clearly shows that American investors, 
retail and institutional alike, increasingly invest overseas. 
Just between 2001 and 2005, U.S. investor holdings of foreign 
securities of all types nearly doubled from $2.3 trillion to 
$4.16 trillion. U.S. investor ownership of foreign equities 
during this same period increased from $1.6 trillion to $2.3 
trillion.
    This is hardly just a U.S. phenomenon. Regulatory and 
technological changes have brought down cross-border barriers 
and allowed, or in some cases forced, exchanges to respond to 
the changing demands of investors and other market 
participants. This new global capital market presents both 
promises and challenges to the SEC's mandate to protect 
investors, ensure fair, orderly, and efficient markets, and 
facilitate capital formation. The promises include greater 
competition in the market for financial service providers to 
the benefit of investors and issuers alike, an opportunity for 
investors to diversify their portfolio risk across borders more 
effectively and at less cost, and the ability of issuers to 
seek the lowest cost of capital wherever it might be. Yet the 
potential challenges are significant.
    For many years now the Commission has been aware that the 
growing globalization in the world's securities markets poses 
unique enforcement risks. Historically, pursuing securities law 
violators when evidence has been located abroad presents 
challenges. It has been even more challenging for the 
Commission to repatriate defrauded investor assets if those 
assets have been secreted in another jurisdiction.
    In response to this challenge, the SEC has worked closely 
with its foreign counterparts to develop a series of bilateral 
and multilateral information sharing agreements to facilitate 
the investigation and prosecution of securities law violators 
operating across borders.
    Likewise, issuers and market intermediaries operating in 
more than one jurisdiction may face unique costs in the form of 
different overlapping and sometimes even contradictory 
regulatory requirements.
    In addition to the Commission's ongoing efforts in the area 
of convergence of accounting standards, this past month the 
Commission held a public roundtable to discuss mutual 
recognition of foreign jurisdictions with regulatory systems 
comparable to that in the United States.
    I expect the Commission will continue to grapple with these 
types of complex cross-border regulatory issues and I 
appreciate the opportunity to present my views and observations 
on these topics and look forward to answering your questions. 
Thank you.
    Chairman Reed. Thank you very much, gentleman.
    Mr. Sirri, both you and Chairman Cox have outlined both the 
opportunities and risks of this new globalized securities 
market. As a practical matter, as you look out, one of the 
major risks I think you've illuminated is of unethical 
practice, market manipulation, et cetera. What specific steps 
can you take even now, before formal arrangements with other 
regulators, to react to those potential problems?
    Mr. Sirri. What you are raising is a very important issue. 
I think within the context of what we are looking at, we 
believe that the jurisdictions that we are going to be 
interested in dealing with are jurisdictions that absolutely 
internalize the importance of fair and orderly markets of the 
protection of investors. So I do not think we entertain dealing 
with markets where issues like rampant market manipulation 
would be present.
    If that was the case, I think we would have a great deal of 
trouble coming to any kind of comparability determination. So I 
think the main way we intend to deal with it is to only 
entertain discussions with markets that have very similar 
approaches and philosophies to ours, not just by--and I want 
emphasize--not just by philosophy but also by practice. It has 
to be a practical consequence that, in fact, they internalize 
the importance of anti-manipulation rules and procedures.
    Chairman Reed. Are you developing a work plan, if you 
will--because we anticipate that this is happening, the 
marketplace is integrating--to begin to systematically look at 
these markets and verify all the issues that you listed in some 
type of orderly way?
    Mr. Sirri. It is a good requirement because what you are 
essentially getting it, I think, is what is the process whereby 
the staff would come to a schema to let us go through and 
recognize regimes. I think we are really dealing with this in 
two parts. The first part is really an exercise in, if you 
will, drafting and rule writing where we are considering what 
would the exceptions look like, the exemptions for the 
exchanges, the exemptions for the broker-dealers. How would we 
actually craft those exemptions?
    The second part, which I think you are alluding to, is what 
would the procedures, what would the process be that you go 
through? What would the steps you lay out and what would be the 
indicia of comparability? That is also something that we are 
hashing out right now.
    This is going on at the staff level and there are active 
conversations within the staff. The Chairman has asked that we 
put together a task force of the staff that includes 
representatives from my division, the Division of Market 
Regulation, Ethiopis' Division at the Office of International 
Affairs, Division of Corporation Finance and the Division of 
Investment Management, so as to get a holistic view of the 
regime.
    That task force is working together right now. It is at a 
formative stage, but to get exactly at the issue you raise.
    Chairman Reed. You are suggesting, and I think properly so, 
that you would like a very high bar in terms of what countries 
you would deal with directly and essentially welcome into the 
marketplace and vice versa. But could you anticipate pressure 
to lower the bar from American exchanges who want to trade in 
some countries who seem to be a little less reliable from other 
Government agencies, like the State Department perhaps, 
inadvertently who want to facilitate all types of commercial 
transactions? And how would you respond to that?
    Mr. Sirri. I think you put your finger on something that is 
quite important. Yes, we do anticipate various kind of 
pressures, whether it is from brokers, from exchanges, from 
certain classes of investors, or from other branches of the 
Government that have their own concerns, I think a lot of 
people have dogs in this fight, if you will, and have their own 
interest that they follow.
    So I think our best approach to handle this is to stick 
very closely to our mandate. We have a focus, capital 
formation, investor protection, fair and orderly markets. And 
that is what we, in fact, intend to focus on. I think 
especially the regimes that we intend to deal with early on are 
regimes that we feel have really strong comparability to our 
own regimes. I hope and I think that will help us find our way 
through.
    I think the Chairman has also voiced publicly his sense 
that by following such a procedure he hopes to raise the level 
of overall securities regulation globally by holding up a high 
bar, as you suggest, that not only will we only admit and 
recognize such regimes, but that other regimes that are perhaps 
more marginal would, in fact, rise up to our standards. So I 
think that is one of the hopes of our chairman.
    Chairman Reed. Thank you.
    Mr. Tafara, let me move to some specific concerns. Mr. 
Sirri said it, you said it in your testimony, on paper, the 
forms, the structures might exist. But the practice is what you 
really are concerned about. What factors would you consider, 
specific factors, in terms of evaluating the comparability of 
regimes?
    Mr. Tafara. That is one of the difficult issues we will 
have to grapple with. As Erik has noted and as you have noted, 
mutual recognition really amounts to reliance in several areas. 
There's reliance on foreign laws and rules, reliance on their 
implementation, reliance on supervision by foreign counterpart, 
reliance on examination by a foreign counterpart, and at some 
level reliance on the enforcement regime they have in place.
    The comparability assessment with respect to rules will be 
relatively easy. The more difficult part will be determining 
whether or not you can rely on a counterpart's examination and 
supervision. And there you will be looking at the intensity of 
the supervision. Is it like the intensity and the supervision 
that is undertaken by the SEC? What sort of examination program 
is it? How broad is it? How frequently do they do it? There 
will be a number of factors of that sort that will have to be 
considered to determine to what extent you can actually rely on 
the supervision examination or enforcement that is conducted by 
a foreign counterpart.
    Chairman Reed. Let me ask both of you quickly, and this 
might require a long response which you might subsequently 
submit. But Professor Ferrell, in his testimony, suggests that 
besides formal structures, an analysis of the bid-ask spread 
and, as he describes, the information asymmetry component of 
the bid-ask spreads. Is that type of analysis something you 
would be prepared to do or would see as useful? Mr. Tafara and 
then Mr. Sirri.
    Mr. Tafara. Yes. How you determine the comparability of a 
regime, how you measure it, I think will require that you look 
at a number of factors. I think you're going to have to look at 
the manner in which they actually conduct supervision and 
examination. But there are other factors that you could look at 
that are quantitative that may give you an indication of that 
nature of the regime in question.
    Looking at inputs as well as outputs, how many enforcement 
cases are brought in a given period of time. The bid-ask spread 
is something that I have heard Professor Ferrell refer to and 
certainly something that should be examined as a potential 
indicia of comparability.
    I think we will be looking at all sorts of factors of that 
kind, quantitative as well as qualitative, in making that 
determination.
    Chairman Reed. Do you have a comment, quickly, Mr. Sirri?
    Mr. Sirri. Yes, I do. As you have noted, I have been an 
academic. I think I spent half my life calculating bid-ask 
spreads as an academic. So I have a reasonably good feel about 
what they do. I think it is a reasonable thing to do because, 
as Ethiopis said, it is a quantitative measure. It gets at how 
well information is coming into a financial market. And as 
Ethiopis said, I think it is one thing you look at. I think 
there is a question about how much you rely on it. But I think 
it is a very reasonable and sensible thing to do.
    Chairman Reed. Just a final point before I recognize 
Senator Crapo. I presume you are also looking at the real 
budget that these enforcement agencies have to work with 
because in many respects that really defines the effectiveness 
and enthusiasm of the regulators.
    Mr. Sirri. Absolutely. That is a great example. It is a key 
input. Without a budget, you cannot reasonably expect any type 
of monitoring or supervision.
    Chairman Reed. Senator Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman.
    I think I will direct my questions to both of you and I 
would invite you to both respond to this. Just to kind of set 
the stage for where I am trying to go here, I want to talk 
about what the impact of terms of listings will be if we do 
actually implement a mutual recognition system.
    Here is where I am headed. It seems to me--well, during the 
last 7 months or so there have been three critical studies that 
have been published regarding the competitiveness of the United 
States in capital markets. All of them have indicated, as does 
the testimony of NASDAQ and NYSE here today in their written 
testimony, have indicated the U.S. leadership in capital 
markets is declining. There are various reasons attributed to 
that by different experts but everyone agrees, or at least 
seems to agree, that one part of the problem is the extensive 
regulatory burden that is faced by those who operate in the 
United States.
    With that background, the question I have is if we--and by 
the way, I like the notion of mutual recognition and I think we 
need to be moving in these directions. But I think we may want 
to go beyond mutual recognition to perhaps a reform of the U.S. 
regulatory system overall. That is where I am headed with my 
question.
    If we maintain our current regulatory system in the United 
States, which I believe is too cumbersome and burdensome, but 
then grant mutual recognition to other jurisdictions, say 
London or Hong Kong or Shanghai or whatever, and make it so 
that a person or an entity can list in another jurisdiction but 
gain access to U.S. markets, why wouldn't that increase the 
tendency for increased listings outside of the U.S.? Do you 
understand my question? Would it do that? And what are the 
consequences of that?
    Mr. Sirri. It is a great question and I think it has been 
cast in many ways, regulatory, arbitrage and others. You bring 
up--I think the general point is that if you can access U.S. 
capital markets more freely, then list overseas in a lighter 
regulatory regime, are we going to lose listings in that sense.
    Senator Crapo. Right.
    Mr. Sirri. I think that is one of the tensions that we feel 
here.
    I would point out that today institutional investors have 
pretty broad access to capital markets globally. And so the 
procedure that we are talking about here is really one of 
reducing frictions. In the process of going through this page 
mutual recognition regime and considering it, we have talked to 
various market participants. For instance, I have asked 
questions of institutional investors. Today are our 
restrictions on say trading--the kind of things that are dealt 
with in the exchange proposal--are they such that you do not 
hold securities that you would otherwise hold if those screens 
came here? And the answer is uniformly no.
    The reason is because large institutional investors either 
have trading offices overseas, they have well-developed 
correspondent relationships with internationally active brokers 
and such.
    What we are really talking about here is reducing some of 
the costs and increasing the efficiency of access. I think it 
is less likely to be wholesale access to markets that they 
otherwise did not have. So I am hopeful that--the arbitrage 
principle, I think, is very important but I am hopeful that is 
not that forceful. But it is something that we are wary of and 
it is a tension we feel.
    Senator Crapo. Mr. Tafara.
    Mr. Tafara. With respect to this question of competitive, I 
always struggle with it. I do not know whether the U.S. market 
is less competitive. It is certainly facing greater 
competition. I think there are deep pools of capital around the 
world now. And in essence, issuers have choice, have a choice 
as to where they list.
    Sometimes they make choices that have nothing to do with 
the lack of competitiveness of one market and have more to do 
with the fact that, for example, a Chinese company may list in 
Hong Kong because by virtual of proximity and language it gets 
better analyst coverage and decides it is the better place for 
it to list.
    Indeed, as Erik has indicated, today what you find is that 
capital is quite mobile. So they do not have to list in the 
United States for U.S. capital to come and actually invest in 
that company. They will go to the Hong Market or wherever it is 
to purchase the securities.
    Indeed it is a metric, listings is a metric that is used to 
determine competitiveness. I think it is one metric and I am 
not sure it is necessarily the best metric. You look at the 
144A market in the United States, it is a very, very active, 
deep, and well functioning market and increasingly so. That may 
be an indicia of competitiveness that favors the U.S. The cost 
of capital in the U.S. is still the lowest in the major capital 
markets. So there is several indicia you can look at with 
respect to competitiveness and, depending on which one you look 
at, you mean come to a different answer.
    However, I do agree that one of the things we have to do is 
to make sure that our regulatory regime reflects the current 
markets and that is something that I think is an ongoing 
process which the Commission engages in and needs to engage in.
    With respect to regulatory arbitrage, it is a major 
concern. The principle thing you worry about with a mutual 
recognition regime is are you allowing your system to be 
arbitraged? I think that is why it is very important that we 
look very carefully at the objective criteria that we develop 
for comparability. You have to determine whether or not you 
have come up with criteria that do not create an incentive for 
somebody to move offshore and yet have the same access to U.S. 
investors, as you have indicated.
    That is what we are reflecting upon. It certainly is a 
major concern on the staff and I expect of the Commission.
    Senator Crapo. I thank both of you. I understand that other 
markets are now becoming more competitive and capital is 
becoming much more available globally. I think not too long ago 
if you wanted to raise $1 billion you pretty much had to do it 
in the United States. Now you can do it in a number of markets 
around the world. And so I understand that the competition that 
is growing and the loss of listings and IPOs and so forth is 
not all attributable to problems with our system.
    I do believe though that there are reasons beyond simply 
the growth of other markets that are resulting in some of these 
difficulties and that we need to pay attention to it very 
closely. And I think that this issue of mutual recognition as 
we get further into it is going to highlight that need. I guess 
what I am saying is I think that we do need to look at the U.S. 
regulatory system.
    There are other pieces of the problem, not just the 
regulatory system, but I think that we need to look at the U.S. 
regulatory system. So while at the same time we are evaluating 
other nations' regulatory systems to see if they are adequate, 
perhaps we need to take a look at our own to see if it is 
adequate and as effective as it could be.
    Chairman Reed. Thank you very much, Senator Crapo.
    We have an opportunity now for a short second round which I 
would like to take advantage of.
    We have been talking, and I think Senator Crapo has opened 
up a very useful line of questioning, about regulatory 
standards. I think Mr. Sirri and Mr. Tafara, you both suggested 
we want to keep the bar high. We raised the bar a bit recently 
with the Sarbanes-Oxley legislation.
    Mr. Tafara, I think you have looked at some of the 
implications worldwide with the suggestion that many other, or 
at least several other, major exchanges and countries have 
started to adopt these because they feel they want to raise the 
bar, also. Can you comment on that trend?
    Mr. Tafara. Certainly. In the wake of Sarbanes-Oxley I 
spent a fair amount of time traveling the world explaining to 
people what was happening in the United States and, quite 
friendly, catching a fair amount of grief. But then an 
interesting thing happened, the financial scandals that we had 
here replicated themselves elsewhere and jurisdictions started 
scrambling for solutions and realized that many of the 
solutions may have already been devised here in the United 
States.
    So what you find now in many of the major jurisdictions, 
major markets, is that they have taken on board much of the 
same Sarbanes-Oxley reform that was instituted here in the 
United States. So you see PCAOBs being created in various 
jurisdictions, changes in auditor independence requirements, 
auditor rotation requirements, making sure that the audit 
committee is the one that is responsible for hiring and firing 
the outside auditor, making sure that the audit committee is 
comprised primarily or entirely of independent directors. So 
much of what we have done in the United States now is the law 
in major markets around the world.
    Even Section 404, which has been the subject of some 
controversy in the United States, the idea of 404 has actually 
been taken on board in most jurisdictions where there is an 
expectation that there be a report that is issued by a company 
with regard to internal controls. And even in some 
jurisdictions they have gone as far as to do what we have done 
here, which is to require that there be an auditing component 
to it as well.
    It is a phenomenon that has spread by virtual of financial 
scandals being not just simply a U.S. event, but scandals that 
have replicated themselves elsewhere.
    Chairman Reed. Thank you very much.
    Mr. Sirri, Ms. Culhane in her testimony, states that the 
growth of internationalization and dark pools are cause for 
concern as they undermine the transparency that is a hallmark 
of our markets and limit access by public investors to these 
investment opportunities.
    Do you share this view as a concern?
    Mr. Sirri. Let me answer that question in two ways. First, 
we are very aware obviously of dark pools. It is an interesting 
name and an unfortunate meant in some ways.
    Chairman Reed. It makes me think of a Steven Lucas name.
    Mr. Sirri. Most of these are crafted as alternative trading 
systems so there is a regulation within the SEC that provides 
for such systems.
    We have taken a view toward our markets that is very 
different than many of the views that are taken globally. We 
have taken a view that says rather than having one or two 
central exchanges, we have allowed various market venues to 
exist. And that has come with a number of benefits.
    I think we see very low trading costs here. We see a lot of 
innovation in our markets. So we do have a couple of very 
traditionally large markets but we also have a smaller regional 
set of markets and we now have, as you point out, up to 30 
alternative trading systems that are in existence, in some ways 
more.
    I think there are benefits with these and there are some 
things that we, as a regulator, have to watch for. The 
benefits, as I have suggested, are technology, lower tradings 
costs, and innovation.
    The things that we watch for actually are related to issues 
like manipulation. Are these pools really dark? Is there 
activity going on with these pools that we need to be concerned 
about? We have been monitoring these. I have personally been 
traveling around to various sponsors of these pools. We have 
not seen problems yet but we are watching for them.
    I also want to point out that by structure these pools are 
limited in size. If a pool gets to be more than 5 percent of 
the trading volume, additional transparency requirements 
devolve around these pools. So today, overall volume of these 
pools is roughly about 15 percent of volume. Were that to climb 
significantly higher, we might have other concerns. But today 
they remain fairly limited.
    Chairman Reed. Thank you. I think, for the record, too it 
is George Lucas and not Steven Lucas in Star Wars. My movie 
trivia has to be sacred and accurate.
    A final question. One of the complaints that you hear and I 
hear, and it goes I think to Senator Crapo's concern about the 
actual effect of regulation, is the long period for the 
approval of rule filings and rule changes for new products in 
the various--through the SEC.
    Can you comment on that in terms of the validity of the 
criticism? And also, is that one of the things that I think 
Senator Crapo is suggesting that we can really reform our own 
procedures not so much by changing dramatically the rules but 
by more quickly working on delivering products?
    Mr. Sirri. It is a fair question to ask. SRO rules have to 
be filed with the Commission and the Commission has to approve 
them. There are a number of tracks whereby that happens. I want 
to point out this is a statutory provision, so the statute 
requires this process.
    But there are a number of channels through which rules can 
go. Today over half of our rules, over half of our rule filings 
are effective upon filing, so-called B3a filings. Which means 
the minute that they drop down upon us they become effective.
    We have also been working as a staff to increase the speed 
through which rule filings flow. So we are very cognizant of 
this and we work as best we can with the SROs.
    But the point you raise is a valid one. Around the world 
many, many, in fact most exchanges, do not have the same kind 
of rule filing requirements that are placed in our statute. We 
are cognizant of that. Quite frankly, as these exchanges come 
in, the pressure will be greater and we will have to pay 
increased attention to the streamlining and the efficiency of 
our rule filing process.
    This it something I know I have had conversations with our 
Chairman with. I think he is very focused on it, and he is very 
sensitive to it. I think we, as a staff, are as well.
    Chairman Reed. Thank you very much, gentlemen. Senator 
Crapo.
    Senator Crapo. Thank you very much. I want to just follow 
up in one area briefly.
    In 1990 the SEC adopted Rule 144A, which has already been 
referenced here. As you know, that rule allows the sale of 
unregistered securities to qualified institutional buyers.
    The growth in capital formation with a 144A component has 
been dramatic. By the statistics I have here it has increased 
more than threefold since 2002 to $1.5 trillion globally. 2006 
was the first year that global equity capital formation with a 
144A tranche exceeded the global equity capital formation on 
NASDAQ, NYSE, and AMEX combined.
    The question I have is a number of people have indicated 
that this raises a cause for concern in terms of whether, by 
this growth of being able to access U.S. capital without 
registering in the United States, is resulting in basically an 
ability to get past the regulatory system of the United States 
and is, as we talked about before, driving listings elsewhere.
    Do you agree with that? Or what do you attribute the 
phenomenal growth of the use of 144A markets?
    Mr. Sirri. The 144A markets are a very important portion of 
our capital market. Traditionally it is a fixed income segment 
of our market. It is a safe harbor. What it embodies is the 
recognition by the Commission that there are segments of our 
capital markets that do not require the full protection of U.S. 
securities laws. That is QIBs, the qualified institutional 
buyers, folks who have more than $100 million under management, 
such people are competent and comfortable acquiring securities, 
purchasing them, and reselling those securities without the 
full protection of U.S. securities laws. The fixed income 
markets have functioned very well with these for some period of 
time.
    So I want to make two comments with respect to that. Even 
within this narrow branch there are markets within the fixed 
income where folks who have offered securities this way will, 
in fact, after the fact register those securities, fixed-income 
securities. So it is not just a--it is an important conduit. 
But registration even within the fixed income domain has a 
place and adds value to these securities.
    You are bringing up a point within the equity markets and I 
think it is just a recognition of that same class of investors 
that say that we are comfortable buying outside the protection 
of the U.S. securities laws.
    I think you are setting off a valid distinction. You are 
setting off a distinction between the 144A markets here and the 
listed markets here, which I think is a fair comparison to 
make.
    Another one I think that is reasonable to look at is the 
144A markets here and the foreign listing markets, where of 
course there would be no regulation at all. I think the 
development of the 144A markets here really should be viewed in 
juxtaposition to the foreign listing or release overseas. In 
that sense, those same institutional buyers would have had no 
trouble buying overseas because for reasons that we discussed 
earlier. They do trade globally today anyway.
    Senator Crapo. Mr. Tafara, did you want to add anything?
    Mr. Tafara. The only thing I was going to add is what Erik 
said at very end, in that in many was you should look at the 
144A market as a market whereby you have brought the 
transactions onshore. They could have transpired elsewhere.
    Indeed, there would have been no difficulty for these 
qualified institutional buyers to buy the securities on the 
foreign market. This actually is a way to bring the 
transactions onshore. In that respect, it may actually be a 
positive development.
    Senator Crapo. Do you have any idea as to why the explosive 
growth has taken place in the 144A market?
    Mr. Sirri. On the equity side of that market?
    Senator Crapo. Yes.
    Mr. Sirri. I do not really know, for certain, but there has 
been increased interest in that market. We have seen various 
systems that are requests for systems. The NASDAQ has come with 
us to a PORTAL system that asks for the resale of those 
securities. Goldman Sachs has a GSTRue, a single broker system, 
that provides for liquidity in that market.
    I think it is just a mark of the sophistication of our 
capital markets. That is there is more innovation in these 
markets.
    Systems like PORTAL were old systems. They were systems 
that were developed a long time ago and basically went on the 
shelf because there was not that much interest. But as you 
quite correctly point out, interest has revived. I am not sure 
of the exact reason for it. And I cannot even say whether it 
will persist.
    Senator Crapo. Mr. Tafara.
    All right. Thank you, Mr. Chairman.
    Chairman Reed. Thank you very much, Senator Crapo.
    Thank you gentleman. And if there are additional questions 
from my colleagues, I would hope we would get them to you in a 
very, very quick order and you would respond appropriately.
    Thank you for your excellent testimony.
    Let me ask the next panel to come forward, please.
    Let me now introduce the second panel.
    Ms. Noreen Culhane is the Executive Vice President of the 
Global Corporate Client Group at New York Stock Exchange 
Euronext. In this role she is responsible for the Exchange's 
worldwide efforts to attract new listings and to serve listed 
companies. Ms. Culhane manages business development, client 
service, marketing and sales support function, the initial 
public offering process, and structured products for the 
Exchange's listings business worldwide.
    Before joining the New York Stock Exchange, Ms. Culhane 
spent said 20 years at IBM. Ms. Culhane serves on the 
management committee for the New York Stock Exchange.
    She holds a graduate degree in education from the College 
of New Rochelle and completed the Advanced Management program 
at Harvard University.
    Ms. Adena Friedman is the Executive Vice President of 
Corporate Strategy at NASDAQ Stock Market. Her responsibilities 
include identifying and developing strategic opportunities for 
the world's largest electronic stock market and overseeing its 
data products business unit.
    Ms. Friedman joined NASDAQ in 1993. She previously served 
as Senior Vice President and Executive Vice President of NASDAQ 
Data Products prior to her current role.
    Mr. Allen Ferrell is the Greenfield Professor of Securities 
Law at Harvard Law School and former John M. Olin Research 
Professor in Law, Economics and Business. He additionally 
serves as the academic expert on shareholder rights on the 
Committee on Capital Markets Regulation and as a member of the 
Board of Economic Advisers to NASD.
    Professor Ferrell holds a BA and an MA from Brown 
University, a very fine school, a law degree from Harvard Law 
School, almost good, and a PhD in economics from Massachusetts 
Institute of Technology. I am parochially minded. Brown is a 
great place.
    Mr. Damon Silvers is the Associate General Counsel for the 
AFL-CIO where his responsibilities include corporate 
governance, pension and general business law.
    Mr. Silvers is a member of the PCAOB's Standing Advisory 
Group, the Financial Accounting Standards Board User Advisory 
Council, the American Academy of Arts and Sciences Corporate 
Governance Task Force, and the New York Stock Exchange Stock 
Options Voting Task Force.
    Prior to working for the AFL-CIO, Mr. Silvers was a law 
clerk at the Delaware Court of Chancellery for Chancellor Wayne 
T. Allen and Vice-Chancellor Bernard Balick.
    Mr. Silvers received his JD and MBA from Harvard 
University.
    I thank you all. Your statements are included in the 
record. Please take 5 minutes to summarize your comments and 
make any comments you would like.
    Ms. Culhane.

 STATEMENT OF NOREEN CULHANE, EXECUTIVE VICE PRESIDENT OF THE 
          GLOBAL CORPORATE CLIENT GROUP, NYSE EURONEXT

    Ms. Culhane. Mr. Chairman and members of the Subcommittee, 
I am Noreen Culhane, Executive Vice President of NYSE Euronext. 
Thank you for inviting me here to testify. We greatly 
appreciate your leadership in holding this hearing.
    Just 16 months ago, the NYSE was a member-owned not-for-
profit exchange focused solely on NYSE listed stocks. Today, 
NYSE Euronext is a multiproduct global company with a market 
cap of $21 billion. We serve as a good proxy to demonstrate the 
three themes that are driving exchange transformation, 
demutualization to gain access to capital and a currency for 
acquisitions, diversification to enter new asset classes with 
better economics such as derivatives, and globalization to 
address investors' desire to diversify portfolios, tap into 
non-domestic markets, trade across time zones and hedge risk.
    This transformation of the exchange business is producing 
significant benefits for investors, issuers, shareholders 
alike. But some trends, such as the growth of off-exchange 
trading are cause for concern.
    In NYSE securities, off-exchange trading increased from 13 
percent in January 2005 to 20 percent of share volume in May 
2007. As participants in the markets take their order flow off-
exchange, and particularly when they internalize by trading 
between customer orders in their own accounts, they compromise 
the integrity of the price discovery process by not exposing 
their order flow to the broader market. This disadvantages 
investors, especially small investors, who may not get the best 
price.
    Another concern is the decline in the U.S. share of global 
IPO business. Last year for the first time Hong Kong and London 
each raised more in IPO proceeds than the New York Stock 
Exchange. Factors include the costs and benefits associated 
with Sarbanes-Oxley. We are misaligned. But recently the SEC 
and PCAOB actions will address this, only if the audit firms 
internalize the guidance that regulators have issued.
    Second is the cost associated with reconciliation to U.S. 
GAAP, which the SEC is successfully addressing by promoting the 
recognition of IFRS.
    Third is the cost of litigation in the U.S., in particular 
class-action lawsuits. Financial centers outside the U.S. 
simply are not similarly burdened. The need for litigation 
reform is clear and compelling.
    At the same time we are addressing these challenges, the 
viability of alternatives available to non-U.S. companies in 
the form of more liquid and well-governed home markets, as well 
as increasingly vibrant private placement market in the U.S., 
has made U.S. listings less critical to successful capital 
raising. The amount of capital raised by foreign issuers with a 
144A component grew from $57 billion in 2004 to over $137 
billion in 2006, more than double what was raised in U.S. 
registered offerings.
    This trend away from public markets undermines 
transparency, sidesteps corporate government protections, and 
limits access by retail investors to investment opportunities.
    But there is also good news. Under Chairman Cox's 
leadership, the SEC has taken a forward-looking and global view 
of capital markets. As a result, we have seen promising 
beginnings of a dialog between U.S. and European regulators. 
The SEC has made a bold move in promoting the concept of mutual 
recognition, to allow U.S. investors to trade securities listed 
on foreign exchanges without requiring these securities or the 
exchanges themselves to be registered with the SEC. This would 
permit more efficient trading among markets, expand the 
availability of capital, promote transparency and increase 
opportunities for market participants on a global scale.
    It is important that the College of Regulators be included 
at the outset, as it comprises regulatory authorities from a 
number of countries, including the UK's FSA. There would be 
significant competitive consequences of a decision by the SEC 
to take a country by country approach.
    It is also important mutual recognition be accomplished in 
a way that permits U.S. public investors access to the global 
markets. Appreciating that some limits have to be imposed, we 
recommend limiting the nature of the securities that can be 
traded to well-known seasoned issuers and diversified funds 
such as ETFs, rather than limiting access to only institutions 
or wealthy investors.
    Last, in today's rapidly evolving global marketplace, our 
ability to innovate and compete is hindered by the lengthy 
review process at all SRO rules must undergo. Foreign 
competitors as well as U.S. futures exchanges and other markets 
that compete with our stock exchanges are not subject as such 
procedural hurdles. We are working to modernize the specialist 
role, to provide new market data products to Internet providers 
and others, to facilitate the listing and training of new ETFs 
and exchange-traded investment products, along with many other 
initiatives to make our markets stronger, more liquid, and more 
competitive. Whether we succeed is largely dependant on the 
efficiency of a regulatory review process over which we have 
little control.
    Thank you for giving me the opportunity to speak today. I 
look forward to answering your questions.
    Chairman Reed. Thank you very much. Ms. Friedman.

   STATEMENT OF ADENA FRIEDMAN, EXECUTIVE VICE PRESIDENT OF 
            CORPORATE STRATEGY, NASDAQ STOCK MARKET

    Ms. Friedman. Good morning, Chairman Reed, Senator Crapo, 
and distinguished members of the Subcommittee on Securities. I 
am Adena Friedman, NASDAQ's Executive Vice President of Global 
Strategy and Data Products, and I appreciate the opportunity to 
testify before the Subcommittee at this moment of extraordinary 
transformational change in the world markets.
    We have entered a new era in which it no longer makes sense 
to think in terms of multiple trading platforms. Global market 
consolidation is both inevitable and ultimately desirable for 
investors worldwide. Major markets are publicly owned, 
increasingly transparent, highly competitive, and keenly 
attuned to customer needs. In this environment, the benefits to 
customers offered by consolidation gain a new urgency and 
importance.
    NASDAQ welcomes the inevitability of global exchange 
consolidation and we have been a leading player in the process. 
We are well positioned and prepared to compete across the 
globe. We have the world's fastest, most transparent, most 
reliable technology.
    The stock exchange of the 21st century is an electronic 
data network, and like any network gains greater efficiencies 
through expanded scale and scope. Let me cite a specific 
example of how consolidation can provide greater efficiency, 
lower costs and better trades.
    Almost 2 months ago, in a $3.7 billion transaction, NASDAQ 
and OMX, a major European exchange based in Stockholm, 
announced that we would combine to create the world's broadest 
exchange and premier technology provider with 4,000 listed 
companies from 39 countries reflecting an aggregate market cap 
of $5.5 trillion.
    With this merger we can offer brokers and traders the 
ability to connect with exchanges around the world through 
technology that can handle stocks, bonds, derivatives, and 
other trading instruments. Issuers will receive enhanced 
services, market participants will benefit from better 
streamlined technology, and investors will have a broader menu 
of services from the OMX Group.
    American markets are in a strong competitive position. We 
must also realize, however, the global economic environment is 
changing in ways that challenge traditional assumptions. The 
United States still represents the largest pool of equity 
capital in the world. In fact, last year the U.S. lead the 
world in IPOs, with over 187 offerings. But maturing markets 
are rapidly catching up and becoming viable alternatives to the 
United States. Notably, last year 22 of the top 25 IPOs chose 
to list outside the U.S. In this highly competitive, 
unforgiving international environment, no country can afford 
unilateral self-imposed handicaps.
    Despite all of our business planning, our technology and 
innovative product offerings, I can tell you from personal 
experience that there is no certainty that the NASDAQ or other 
U.S. exchanges will be successful in maintaining their 
leadership position in the world economy.
    In my discussions with overseas exchanges, I constantly 
encounter questions about the risks and costs associated with 
U.S. regulation, a factor that has played prominently in the 
much studied movement of IPOs abroad.
    We also get difficult questions about the perceived 
unpredictability and uncertainty associated with future U.S. 
regulatory policy that impede our ability to compete for 
investors against global competitors whose business initiatives 
do not face this array of regulatory impediments and inertia.
    Mr. Chairman, an important factor in the ability of U.S. 
exchanges to compete effectively and find partners in the 
process of consolidation will be the ability of Congress to 
continue to support the investor protections so important to 
our capital markets while rooting out the kind of 
overregulation that can handicap the continued evolution and 
growth of the U.S. capital markets as they compete.
    Senator Schumer has been particularly helpful in this 
regard, commencing a study with Mayor Bloomberg to examine ways 
for the U.S. to remain competitive and we appreciate his 
leadership.
    I would like to offer the Committee the falling specific 
recommendations designed to address these issues. They include 
first, Congressional reaffirmation that U.S. laws apply solely 
within the United States.
    Second, regulatory certainty for exchanges, including the 
notion that there will not be differential regulatory standards 
for U.S. exchanges and foreign exchanges operating in this 
country.
    Third, recognition that the modernization of our regulatory 
system is critical as companies and investors are increasingly 
choosing to seek and commit capital outside the United States.
    And fourth, serious consideration of a principles-based 
environment of regulation that will enable exchanges to act 
quickly and decisively to meet domestic and global competitive 
pressures without diminishing investor confidence in the 
capital markets.
    I appreciate the opportunity to testify before the 
Subcommittee on these important issues. Thank you.
    Chairman Reed. Thank you very much. Professor Ferrell.

STATEMENT OF ALLEN FERRELL, GREENFIELD PROFESSOR OF SECURITIES 
                    LAW, HARVARD LAW SCHOOL

    Mr. Ferrell. Mr. Chairman, distinguished members of the 
Committee, it is a great pleasure and a privilege to justify 
here today. So thank you.
    When I was thinking about this topic, the topic of cross-
border mergers, it occurred to me there is many gateways into 
the topic. The gateway I would like to talk about or begin with 
is an event that happened in 1993. That was the first 
demutualization of a stock exchange, the Stockholm Stock 
Exchange, where it went from being a membership-owned 
organization to an organization that was-for profit and 
publicly traded. Indeed, the Stockholm Stock Exchange listed on 
itself.
    After that event, the floodgates were opened and many 
exchanges demutualized in the following years. The Helsinki 
Exchange in 1995, Copenhagen in 1996, Amsterdam in 1997, 
Australia in 1998, Hong Kong in 2000, of course the New York 
Stock Exchange, NASDAQ and many, many other exchanges likewise 
demutualized.
    I think an important question is why did these exchanges 
demutualize? What implications does that have for regulatory 
policy? And how does that connect up with cross-border 
exchanges?
    I think the reason why we see demutualization, again 
beginning in 1993, is just the intense competitive environment 
that was created by the reduction in computing and 
telecommunication costs, which made it much easier to set up 
competing execution facilities and made it much easier to route 
orders around the world. That forced exchanges to move to a 
more competitive organizational structure.
    Demutualization enabled exchanges to have more efficient 
decisionmaking process. It was a way--demutualization, in many 
cases, was a way of buying out vested interests, members that 
had a vested interest in old technology and old trading 
systems, to buy them out, to transfer ownership to a new set of 
owners that would be more willing to adopt competitive trading 
systems. Often, but not always, that meant electronic trading 
systems.
    Finally, demutualization enabled exchanges to more easily 
engage in mergers because now there was a currency with which 
you could merge. That is the shares with ownership rights. So 
demutualization is a function largely of competition but that 
also created a new set of possibilities for exchanges, 
including electronic trading and increased cross-border 
mergers.
    I think what the regulatory issues that the SEC and 
regulators around the world face as a result of 
demutualization, as a result of electronic trading being 
adopted, and finally cross-border mergers are several. First is 
regulatory arbitrage. Are you going to have the proper 
incentives as an exchange to set your regulatory budget if you 
are facing fierce competition for listings and trading against 
other trading venues? Do you, as an exchange, have proper 
incentives to regulate oneself, particularly with respect to 
listing standards, when you list on your own exchange?
    And a perennial issue in the United States is an exchange 
that has self-regulatory obligations. Are there going to be 
proper incentives to regulate competitors if your self-
regulatory obligations require you to regulate non-members in 
trades that occur on the exchange?
    And so those are the regulatory issues that I think this 
raises.
    I am going to end my remarks by making a few observations 
on mutual recognition, which is a direct outgrowth of the rise 
of cross-border trading, the adoption of electronic trading so 
geographical location is less important, and these cross-border 
mergers.
    I would modestly offer three observations that I think 
should inform the SEC's approach in deciding whether a foreign 
regulatory regime is comparable to the U.S. regulatory regime.
    First is a lot of focus has been, and rightfully so, on 
looking at the regulations and statutes of the foreign regime 
and seeing whether they provide for investor protection 
comparable to the U.S. I also think it would be very important, 
complementing that analysis, is to look at how well do those 
capital markets actually work in these foreign jurisdictions? 
Financial economists, the World Bank, and many other 
organizations have spent a lot of time putting together 
financial data that provide indicia of how well those markets 
are working. Part of that is the bid-ask spread but there is 
many other outcome measures that one could use as well.
    That also has the benefit of moving away from qualitative 
judgments to more quantitative.
    A second observation I would quickly make is the fact that 
foreign jurisdictions may face different regulatory problems in 
the United States and that might call for a different 
appropriate regulatory response.
    And then finally, mutual recognition is not an all or 
nothing proposition.
    With that, I will end my testimony and thank you again for 
having me.
    Chairman Reed. Thank you very much. Mr. Silvers, please.

 STATEMENT OF DAMON SILVERS, ASSOCIATE GENERAL COUNSEL, AFL-CIO

    Mr. Silvers. Good morning, Chairman Reed. Thank you for the 
opportunity. And Senator Crapo, thank you for the opportunity 
to be here.
    We are going through a period of dramatic change in the 
very nature of our capital markets. 10 years ago the New York 
Stock Exchange could be actually described as a place where 
securities are traded, a place located in New York City, USA.
    Today while that building still exists, the New York Stock 
Exchange is many other things, a brand, a component of an 
international holding company, a network of trading software, 
and the building is less and less important. Rather like the 
role of the original Disneyland in the Disney Corporation.
    Thus we live in an age of convergence, convergence in 
accounting systems and potentially of securities regulation 
across national borders, what we are talking about when we talk 
about mutual recognition.
    In this context, policymakers in the United States need to 
consider the following three national interests that we have, 
permanent national interests, as the process of globalization 
moves forward in our capital markets.
    First, we have an interest in ensuring that our Nation's 
capital markets and the global capital markets direct resources 
to sustain wealth generating activity in the U.S. economy.
    Second, we have a profound interest in strong investor 
protections for Americans who invest their savings and their 
hopes in the global capital markets.
    And third, we have an interest, and a very strong one, in 
maintaining and growing capital markets activity, actually 
human beings doing things, in New York and the other financial 
centers of the United States.
    The labor movement worldwide, including the AFL-CIO, is 
concerned that our increasingly global capital markets are 
having difficulties providing financing with time horizons 
appropriate to the needs of operating businesses. In Europe the 
labor movement labels these trends in a negative fashion as 
``financialization.'' I have attached to my written testimony a 
lengthy speech by the leader of the European labor movement on 
this subject.
    A powerful way to conceptualize this concern is to consider 
the fact that in 2006 there was approximately $2.4 billion 
invested through capital markets and alternative energy 
technology venture capital. That sounds like a big number until 
you consider that the video game industry generated $7.6 
billion in revenue.
    Overall our accounting and disclosure systems, our 
corporate governance system, and our tax regime all need to be 
oriented toward encouraging our markets to produce sustainable 
long-term value in the real global economy. This has been the 
consistent theme motivating the labor movement's advocacy of 
improved corporate governance, accounting and auditing systems, 
our support for giving long-term investors voice on corporate 
boards, our concern about leveraged finance and short-term 
strategies pursued by hedge funds and LBO firms, and our 
concerns about the universal adoption of mark-to-market 
accounting that may undermine the unity of operating businesses 
to accurately disclose their results.
    However, we have heard recently that these issues that I 
just described are not the real national interest of the United 
States. We have heard recently that the real problem that our 
markets face is that we protect investors too much. We hear 
this message primarily from people and institutions who desire 
to have weak global standards. Make no mistake about it, when 
you talk about mutual recognition you talk about a process by 
which genuine global standards are going to begin to be set. 
These folks either want weak global standards or want to have 
access to our high-quality markets without complying with our 
investor protections.
    Currently, as has been remarked already today, our markets 
provide a higher multiple for corporate earnings, earnings that 
have been certified essentially by our strong regulatory 
structure than other markets worldwide.
    Now there are issuers that it simply cannot meet our 
standards and do not list here, and others that for noneconomic 
issues are simply unwilling to do so. But the vast majority of 
issuers globally are economically ration and will raise capital 
in those marketplaces and regulatory structures where the cost 
of capital is lowest. And I think the recent data on IPOs that 
the Chairman raised will bear that out.
    Now there is another dimension, in addition to investor 
confidence and strong investor protections, that define our 
competitiveness. One that is important today and will become 
much more important as we move toward a single unified global 
capital market. The future of New York and other major cities 
as financial centers really does depend not just on regulation 
and market structure at the public policy level. It depends on 
the strength of those cities and those areas of economic 
activity in terms of their educational institutions, the 
sophistication of their telecommunications infrastructure, and 
the efficiency of their transportation systems. Substandard 
public education, traffic and airport gridlock, and outdated 
telecom systems are the real long-term enemies of American 
competitiveness in the capital markets.
    Let me end by quoting something that has been relatively 
well-publicized recently that I think defines that threat. In 
2006, 25 individuals who managed hedge funds in the United 
States made three times in personal income what the entire 
80,000 people who teach in the New York City schools that train 
the majority of the people who work in our capital markets. And 
yet those people, those 25 individuals, paid a lower marginal 
tax rate than those school teachers did.
    If we are not prepared to invest in education for the 
average American or to pay the taxes necessary to fund our 
infrastructure and stabilize our Government finances, we will 
undermine the very foundations of our capital market 
competitiveness just when those conditions will become more and 
more important in a truly globalized market.
    Let me conclude and thank you for the--the AFL-CIO would 
like to thank you for the opportunity to consider this very 
important subject of the future of our markets, the importance 
of investor protections, and the linkage of these issues to the 
overall health of our economy and our society.
    Thank you.
    Chairman Reed. Thank you very much, Mr. Silvers.
    Senator Crapo, your questions, please?
    Senator Crapo. Thank you very much, Mr. Chairman. I have to 
leave in just a few minutes and so I apologize. I appreciate 
you letting me start out here.
    Because I have to leave so quickly, I just want to ask one 
question and I want to just ask Ms. Culhane and Ms. Friedman to 
respond because I will not have more time than that. Mr. 
Ferrell and Mr. Silvers, if you would like to respond, I would 
just like to get a written response from you.
    The question I have goes back to the issue I was talking 
about in my other questions of the previous panel. Namely, is 
our regulatory system in the United States correctly positioned 
or do we need to evaluate our own system as we look at other 
systems?
    Really what I am getting at with this question is I am very 
interested in the way that the United Kingdom or Japan have 
gone to a single regulator, which is more principles-based. And 
it seems to me that we could make significant progress in the 
United States in continuing to have strong customer and 
investor protection and strengthening our market integrity and 
achieving effective regulatory compliance but still move toward 
a more principles-based regulatory system.
    I just would be interested in your comments on that.
    Ms. Friedman. Thank you, Senator.
    We agree with that in general. I think that it is very 
important that we do not ignore the fact that the foundation of 
the American markets has been based on a retail investor and we 
do have to make sure that we are very cognizant of the need to 
protect those investors. Whereas if you look in Europe, in 
particular, it has been more--the foundation is more on the 
institutional investor.
    So looking at a principles-based approach has to be very 
carefully measured against the need to make sure that our 
investor protections are well in place. But we do believe that 
there is a more efficient way for the capital markets to be 
able to continue to innovate, provide product to those retail 
investors without the need to file every single rule with the 
SEC.
    And we do believe that a principles-based approach, and we 
have been much more exposed to that in our conversations in 
Europe and elsewhere, provides a foundation where the exchanges 
can have principles that they have to live by but you will 
still have the flexibility to act on smaller things in 
providing new product without the need for a lengthy review 
process by the SEC.
    We do support that and hope that we consider that for the 
future of our markets.
    Ms. Culhane. Senator Crapo, thank you for the question. I 
would echo much of what Adena has just said.
    I will say that I do not think this is either/or type of a 
question. I think there is room for a middle ground here. You 
suggested earlier perhaps a review of the entire revelatory 
process. We have an excellent regulatory process in the U.S. 
capital markets. It is part of what has made us so strong. 
Focus on the individual investor is critically important. That 
is the heart and soul of our country.
    Nonetheless, we find ourselves in a competitive global 
environment and we need to continue to review--all of us, every 
single component of financial securities and securities 
industry marketplace--to ensure we really are doing right by 
investors and also remaining competitive on a global stage.
    Like Adena, we have had lots of opportunity to interact 
with our colleagues in Europe. And it has been very interesting 
as we have gone through merger meetings and training sessions 
to learn that their relationship with their regulators is a 
little different. And I mean it in this way: it is a much more 
collaborative, we are in this together, sort of a mentality and 
approach.
    What I am learning is that they begin at an early stage in 
the development of rules and processes to have a lot of 
collaborative discussion, and in the end reach common ground on 
what is really in the best interest of the communities they 
serve, to the same communities that we serve.
    So we applaud much of what Chairman Cox has undertaken in 
the review, for example, of Sarbanes-Oxley, in the move to 
recognize IFRS, in this move to have mutual recognition with 
other markets. We applaud all of that. We want to be as helpful 
in that process as we can.
    I do think that our eye on the competitive stage is 
critical as we move forward here.
    Senator Crapo. Thank you very much.
    Chairman Reed. Thank you very much, Senator Crapo.
    I want to thank all of the panelists for excellent 
testimony and I wanted to just continue the line of 
questioning. If Professor Ferrell and Mr. Silvers have a 
comment on Senator Crapo's question, we could get it in the 
record now. If you do not, then that is fine also.
    Mr. Ferrell. In terms of the general issue of 
competitiveness in the world market, I think we are in a 
position of strength. But I do think there are specific issues 
that do need to be addressed. I think some of those have been 
addressed by the SEC recently, making it easier for firms to 
deregister, which makes it more likely that they would be 
willing to come in. Recognizing IFRS I think is a positive 
step. I do think there are still issues even with the recent 
reforms in terms of 404 costs for small firms. I think that is 
an issue that needs attention.
    That is not really an issue that goes to our 
competitiveness in terms of listing because small and medium 
firms in foreign countries are unlikely to list. But it is 
still an issue of ensuring a low cost of capital.
    I guess one other issue that often comes up when you talk--
that I have heard from foreign firms when I talk to them about 
their listing decisions in my academic research is the concern 
that if they trade 3 or 4 percent of their market cap in the 
United States, if 3 or 4 percent of their shares trade in the 
United States, they can be sued in District Court in a 
securities class action suit for 100 percent of their shares. 
So I think there is a mismatch there, in terms of liability and 
the percentage of shares that are traded that creates 
competitiveness problems in the listing arena.
    With that, I will end.
    Chairman Reed. Mr. Silvers, any comments?
    Mr. Silvers. Thank you, Senator Reed.
    I think that you see in this discussion the movement of a 
dialogue which at one level is about a series of very discrete 
items, for example the question of whether foreign issuers 
ought to be allowed to delist, a rather straightforward and 
practical problems in certain ways. A discussion like that 
quickly shifts to a very broad discussion about whether we 
ought to consolidate our regulatory structures or whether we 
ought to move from what is allegedly a rules-based system to 
what would allegedly be a principles-based system.
    I think that most investors in the United States, whether 
individuals or institutions, are open and constantly open to 
revisiting on a practical level those aspects of our regulatory 
system that become either outdated or need to be rethought.
    However, those two big ideas are deeply problematic from an 
investor and public interest perspective, and let me explain 
briefly why. First, our regulatory structure in the financial 
markets involves two very distinct types of regulation. One, in 
our banking system, is a system of regulation fundamentally 
designed around an insured deposit system where the goal is 
essentially safety and soundness with very intrusive bank 
regulation that watches the operations and the financials of 
the insured banks on the kind of--in a substantive way.
    Our securities regulation is a disclosure-based regime in 
which risk and loss are just part of a game and where there are 
thousands and thousands of market actors. Many, many more 
regulated entities than there are in the banking system.
    These two systems cannot be smushed together and achieve 
either system's goals, in our opinion.
    Second, the principles versus rules debate is kind of, in 
our view, a non-debate. Any system that works at all has to 
have both principles and rules. If it does not have principles, 
the rules are easily gamed by smart people. If it does not have 
rules, market actors cannot figure out exactly what they need 
to do, how they can be sure that they are acting in a manner 
that is actually consistent with law and regulation.
    A move toward an all principle system is a move that, in 
fact, the business community and the market-making community 
does not want. They say they want it. They do not want it. The 
reason why they do not want it is because a genuine principles-
based system, genuinely enforced, would mean that you would 
always be second guessed. Anything you did as a market actor 
could be looked at in the light of the principles and found to 
be a violation of the law. Nobody actually wants to live by 
that system.
    People who are advocating weaker investor protections in 
this country use the notion of a principles-based system as a 
code word for deregulation which again is essentially an attack 
on the fundamental foundations of what makes our marketplace 
superior. Our marketplace is superior because we have real 
investor protections that are truly enforced by competent and 
well resourced regulators.
    People bring their money to this country and are prepared 
to accept a lower multiple on corporate earnings because they 
have confidence that their earnings are real, the numbers are 
real, their money is really somewhere where they can get it 
back.
    Attacking those things, whether you attack them directly or 
through code words, is a profoundly risky and dangerous thing 
to do.
    Chairman Reed. Ms. Culhane and Ms. Friedman, we have talked 
and the previous panel talked about the pressures because of 
this new globalized market and pressures that you feel every 
day. One of the areas where you have to be active is the 
standards for listing on your exchanges. I am sure you are 
seeing already other companies coming to you that do not quite 
meet your listing standards but they can go over to other 
markets.
    How practically do you deal with that downward pressure on 
standards? The issue I talked with Mr. Sirri about how do you 
keep the bar high? Ms. Culhane and Ms. Friedman, both of you, 
please.
    Ms. Culhane. Thank you.
    Our standards are, as you know Mr. Chairman, they are filed 
with the SEC, they are disclosed and they are strictly adhered 
to. They are bright line tests. So there is not a lot of 
discussion or what I would call ability on our part to, in any 
way, shape them differently from what they are.
    I will say the New York Stock Exchange has an excellent 
track record of listings. We have had a very active listings 
calendar this year, both domestically and internationally. And 
interestingly, particularly from emerging markets such as 
China, India, and Brazil. Some of these companies are very, 
very large but others are not. They are small and mid-type 
companies who seek the U.S. capital markets for many of the 
reasons that Mr. Silvers just outlined.
    We really believe, and one of the things that we have done 
in order to help us reach a broader audience of listing 
opportunities, listing prospects, is to build a second listing 
platform in NYSE Arca with a set of standards that are 
different from the New York Stock Exchange's. Yet, they are 
still fully transparent and strictly adhered to. They are 
strong standards.
    We have no interest in developing a set of standards such 
as those that we find in some European markets where there 
really are no standards, where anybody can basically come and 
list securities there. We find those markets, frankly, to be 
very illiquid. We find there to be very little investor 
interest in those products.
    The New York Stock Exchange, we believe, is the hallmark of 
exchanges globally. We have excellent standards, very high 
quality companies who have done extraordinarily well on a 
global stage. And our plan is to keep that at that level not 
just because it serves investors well but frankly, it serves us 
well in keeping the brand equity of the New York Stock Exchange 
as stellar as it is globally.
    Chairman Reed. Ms. Friedman, your comments.
    Ms. Friedman. Thank you.
    I actually echo a lot of what Noreen said because of the 
fact that NASDAQ has been very clear in making sure that it 
provides for capital formation at different levels of 
development of individual issuers. We have, therefore, put our 
market into three tiers. The highest tier of our market action 
actually has the highest listing standards in the world.
    The one thing that we are very clear on is we never want to 
see a race to the bottom. In fact, we want to create 
competition as a race to the top.
    We do understand that there are pressures being put on the 
U.S. markets by other exchanges that may not have the same 
listing standards but we are just not interested in following 
that track. We are interested in making sure that if a company 
chooses to list in the United States and chooses to list on 
NASDAQ, that they are there with very strict rules, very strict 
standards, and that they are ready to live by those standards.
    It is really a matter of making sure that the cost of 
complying with the standards not only set by NASDAQ but also 
set by the U.S. Government are not to the extent that it keeps 
them out of the market overall.
    One thing that we have been very pleased to see is the 
efforts by the SEC to look at 404 and really examine 404 much 
more closely with the PCAOB to make sure that the cost of 
compliance with 404 is not overly onerous but the principles of 
404 and Sarbanes-Oxley itself stays intact.
    So it is really a matter of making sure that the burdens of 
listing in the United States or the requirements are very 
clear, are very strictly adhered to, but are not so costly as 
to make it so that they just have no interest in coming here in 
the first place.
    We are very pleased and very proud of the fact that 
companies that come list in the United States do tend to enjoy 
higher valuation because of the investor protections that they 
are afforded here in the United States and the stamp of 
approval. But at the same time we want to make sure that they 
have the ability to come here in a streamlined and efficient 
manner.
    Chairman Reed. Thank you.
    This issue also can be characterized, as I think Mr. 
Silvers mentioned, as convergence of standards. And we are all 
hoping that the tide goes up and not out.
    One area though is I think sometimes we presume that our 
standards are the best and the toughest, et cetera. But I 
wonder, Professor Ferrell and Mr. Silvers, if you look 
overseas, particularly in the area of shareholder rights, are 
there things that we should be trying to import into our regime 
that do not exist?
    Mr. Ferrell. In terms of shareholder rights, the work I did 
for the Committee on Capital Markets Regulation was on the 
shareholder rights issue. In this regard, there is a lot of 
reference to London today in these discussions. I think the UK 
takeover panel and the substantive rules concerning takeovers 
in the UK and how they enforce those standards in the UK are 
something that we could learn a lot from. This really goes to a 
State corporate law issue and Delaware corporate law and not so 
much SEC regulation. But I think the UK has a very good system 
in terms of shareholder rights in the context of takeovers.
    Basically in the UK--and I am simplifying here a little 
bit--if you, as a firm, want to adopt a poison pill which 
basically makes it impossible for a takeover to occur, if you 
want to adopt a poison pill, you have to get shareholder 
ratification to do that. Under Delaware corporate law, again it 
is a simplification, there is fairly loose constraints on the 
ability to do that.
    So my bottom line here in terms of shareholder rights is I 
think the UK has a very pro-shareholder rights approach and you 
can see that particularly in the takeover context. That is 
simply not true under Delaware corporate law. I think there is 
a lot of empirical evidence and theoretical reasons to believe, 
that I could go into, that the UK approach is something that 
the U.S. could learn from.
    I think this discussion is not just that we have high 
standards and other foreign jurisdictions can meet them, but 
also that we can learn from other jurisdictions as well. And I 
think this would be an example of that.
    Chairman Reed. Thank you.
    Mr. Silvers your comments, and then I want to yield to 
Senator Schumer.
    Mr. Silvers. Thank you, Chairman Reed.
    I think that Professor Ferrell's comments are very apt. In 
general, long-term institutional investors do not always oppose 
the use of a poison pill but they want a say in it. They want 
to be able to know that it is being used responsibly.
    I think, in addition to what Professor Ferrell said, there 
is an issue that is very much in front of it, I alluded to it 
in my testimony, and that the SEC is facing right now, which is 
the role of long-term investors in selecting corporate 
directors.
    In the United Kingdom there are several mechanisms by which 
investors can do so. Because there is a relatively concentrated 
marketplace in the UK, those mechanisms tend not to actually be 
used formally. People sit in a conference room and let the 
company know that they want to nominate directors, and since 20 
or 30 institutions hold at least a plurality of the stock of 
most UK public companies, it is a pretty straightforward 
process.
    In the United States, where we have a more diversified 
ownership base, you need different mechanisms to accomplish 
this. But it is very clear that when foreign investors come to 
our markets, when we talk to our counterpart pension funds in 
the UK, in Scandinavia, what they say to us is we think the 
investor protections, in many ways, in the United States are 
superior. The major problem here is that you have very weak 
boards of directors and that we as investors do not really have 
a way of holding them accountable. They point particularly to 
issues of executive pay in that regard.
    Chairman Reed. Thank you very much.
    I have additional questions for a very short second round, 
but Senator Schumer.
    Senator Schumer. Thank you, Chairman Reed, and I very much 
appreciate your having this hearing. This is a time when we are 
fighting to remain competitive in capital markets. The world 
is, of course, is becoming--has become one, especially when it 
comes to intangibles such as what we are talking about here. So 
it is critical that in Congress we begin to seriously discuss 
these measures to ensure continued U.S. leadership in the 
global financial services marketplace. The hearing is a great 
thing to do.
    Now mergers such as the New York Stock Exchange's merger 
with Euronext and NASDAQ's acquisition of OMX are historic and 
for the first time U.S. companies are owning and operating 
capital markets in foreign countries. Who in this room would 
not want to see that be successful? It really helps America 
stay No. 1.
    So I think it is important that we facilitate that success. 
At the top of the list, of course, is if we are going to apply 
U.S. regulations to these foreign exchanges in any way we will 
chase them away. I have got to tell you, faced with the choice 
of having U.S. involvement or chasing everybody away and 
letting it go somewhere else, you know where I stand on that. 
So I think it is really important that we do that.
    But then we have to talk about how to both keep our system 
of regulation, it works, it is good for investors, and at the 
same time not lose the whole ball of wax to the least common 
denominator out there because companies will want to flee to 
the lowest regulation. Because it is not in their long-term 
interests but it is sometimes in their short-term interest.
    So I would like to ask a few questions about that. We are 
talking about mutual recognition between U.S. and foreign 
regulators. I think that is great. I wish I had been able to be 
here earlier, Mr. Chairman, for the SEC's testimony.
    But I would like to ask our panelists, it is another part 
of this, we want to reconcile U.S. and foreign regulation. At 
the same time, U.S. regulation is one big mess in the sense 
that we have competing regulators with different ways and 
ideas. Companies in London, they have the FSA and they are the 
law. Here we have 10 different regulators and they sometimes 
say contradictory things. The report that Mayor Bloomberg and I 
put out said that that was one of the keys, to have one system 
of regulation.
    The CFTC is off there on its own, it is a different type of 
regulator than the SEC. The products are blending and merging. 
We are never going to merge the two of them. But one of the 
things we recommended is the same regulatory framework apply to 
both, so there are not contradictions.
    Secretary Paulson, Chairman Bernanke have both expressed a 
desire to help move in that direction. I was wondering what 
each of the panelists thinks about that? We can go from left to 
right, Ms. Culhane. If you agree, just be brief. If you 
disagree, you can be a little longer.
    Ms. Culhane. Thank you, Senator Schumer.
    I think that the basic fundamental thing here is that we 
really are all operating, as you aptly point out, on a global 
stage. If you look to simply at the U.S. capital markets in a 
vacuum, you might have one set of answers or responses and a go 
slower mentality might be appropriate.
    In today's world as we stand very much interlinked on so 
many different levels, it really is appropriate for us to 
consider all the options that are available.
    As I said earlier, I am not sure there is any one-size-
fits-all perfect answer to the way regulation should work. But 
looking, as other industries have done, at best practices, best 
principles, and trying to come to some determination 
collaboratively on how we might work together----
    Senator Schumer. You mean within the U.S. or U.S. versus 
foreign?
    Ms. Culhane. I mean globally. I mean within the U.S. but I 
also mean outside of the U.S., as well.
    I would say that if you look at the College of Regulators 
in Europe, those were different markets who came together and 
established this notion of a College of Regulators who did two 
things. One, they began to harmonize the rules between and 
among the markets and between and among different asset 
classes. But two, they were also kept as a principle No. 1 
investor protection. But as principle No. 2, they sought to 
ensure the competitiveness of their markets on a global stage 
through their regulatory framework.
    I think these are things that we do not have to invent. We 
can look to other places and emulate.
    Senator Schumer. Thank you, Ms. Culhane. Ms. Friedman.
    Ms. Friedman. Thank you, Senator Schumer.
    We are supportive of looking at the regular structure of 
the United States and realizing that while we have different 
needs than maybe perhaps the regulators in Europe, with the 
fact that so much of our foundation is built on the retail 
investor. We also have to recognize the fact that our clients, 
whether it is the investors or the broker-dealers or the 
issuers, they are very global in nature. If we look at the way 
that investors are investing in different instruments, they are 
very much looking across instruments. They are not choosing to 
invest just in equities or just in fixed income or just in 
derivatives. They are using those instruments interchangeably.
    Therefore, they should have a regulatory structure that 
allows for them to be able to invest in those instruments in a 
way that is streamlined, efficient, and still preserves the 
investor protections.
    So the convergence or at least of these of the standards of 
regulation with the United States is certainly in the interest 
of the investors, and therefore is in the interest of 
exchanges.
    Senator Schumer. Mr. Ferrell.
    Mr. Ferrell. I agree with the substance of your remarks. 
Thinking back to past fights between the SEC and the CFTC as to 
jurisdiction over different products and the amount of effort 
that went into that, it is not effort well spent to fight over 
jurisdiction. And so I do think clarifying jurisdiction, to 
have some kind of--pulling it together in some kind of overall 
regulatory framework makes a lot of sense. And we can learn 
from London on that.
    Chairman Reed. Thank you. Mr. Silvers.
    Mr. Silvers. Senator Schumer, you have put your finger on 
the one of sort of regulatory merger and I think we would 
pretty strongly support, even though you said you did not think 
it was practical. The notion that there is something profoundly 
different between the markets that the CFTC are regulating in 
the derivatives area and what the SEC is regulating is foolish. 
There are two other areas where we are not so enthusiastic.
    Senator Schumer. It started with pork bellies and equities 
and now it is not.
    Mr. Silvers. Essentially you can trade the same thing and 
do it in one jurisdiction or the other. That is not only, I 
think, inefficient but dangerous.
    Pushing securities and bank regulation together we think is 
a bad idea. And we think that the calls that have come to 
essentially get rid of the state regulatory system in 
securities and banking is also foolish. The reason why we think 
it is foolish is because that system is a backstop.
    I think we learned, thanks to the efforts of some fine 
civil servants in New York State, that when one part of our 
regulatory system weakens dramatically and threatens our 
markets very integrity and competitiveness, we have a backstop. 
We think that is extremely important.
    Senator Schumer. We only went over by 10 seconds, so I 
thank the panel for their succinct and on-the-point answers.
    Thank you, Mr. Chairman.
    Chairman Reed. Thank you, Senator Schumer.
    I should point out publicly the leadership role that 
Senator Schumer has played in terms of all these issues. Ms. 
Friedman already recognized you, Senator, but you have really 
been a champion in terms of making sure that our markets remain 
competitive. Thank you very much, you and the Mayor.
    I should also point out, too, that we will ask the GAO and 
process GAO to look at the issue that blurring these product 
lines, the derivatives, et cetera, and the continued usefulness 
of the functional difference between CFTC regulation and SEC 
regulation. We will look forward to that study.
    Let me ask a few concluding questions. First, Professor 
Ferrell, there was mention before on Rule 144A of the huge 
increase, and I think Ms. Culhane also mentioned it. Do you 
have any sorts of insights in terms of what is driving it? Does 
this represent a challenge to the regulators in terms of its 
growth?
    Mr. Ferrell. I do not think you can draw any inferences, 
positive or negative, from the mere fact that--although 
important--that the 144A market has grown dramatically. There 
could be benign explanations as well as troubling explanations 
for that.
    So I would prefer to look at specific issues and look at 
the evidence in terms of whether the regulation is working 
optimally and not draw any broad conclusions just from the rule 
144A market.
    I will make one other point on that, and Erik Sirri alluded 
to this in his testimony. It is perfectly possible for a 
security to be placed in the 144A market and end up in the 
public markets at some point via Rule 144 transaction or via a 
PIPE transaction. So the mere fact that it is unregistered at 
one point does not necessarily mean that it is going to be 
unregistered forever. That is, I think, an important point to 
keep in mind, as well.
    Chairman Reed. There is some indication, I think, that a 
lot of these 144A transactions actually involve, obviously 
involve, huge international participation, either securities of 
companies listed outside of the United States or United States 
money going there.
    Mr. Ferrell. Absolutely. I am sorry, I did not mean to 
interrupt.
    You see foreign listings or public offerings in foreign 
markets or foreign capital raising and very often in 
conjunction with that foreign transaction raising capital you 
have capital being raised in the United States via Rule 144A. 
So you could have a 144A arm of the transaction in the U.S. in 
conjunction with capital raising in foreign markets. It is very 
common.
    Chairman Reed. And doesn't that, to a certain degree, sort 
of distort the perception? The perception is this is now 
outside of the United States, all of this capital is being 
raised overseas, our markets are not participating. When, in 
fact, in many cases through 144A our markets are participating 
quite actively in these global transactions. Is that an 
accurate assessment?
    Mr. Ferrell. My sense is a significant portion--I do not 
have the figures offhand--a significant portion of the 144A is 
in conjunction with foreign companies raising capital in the 
U.S. in conjunction with other jurisdictions.
    Chairman Reed. Ms. Culhane, please.
    Ms. Culhane. If I could just comment, Mr. Chairman, I would 
say if you look particularly at last year's numbers and you see 
the enormous amount of proceeds raised on the Hong Kong Stock 
exchange, you can note that two of those transactions, two of 
the Chinese banks that listed, were the overwhelming 
preponderance of the proceeds raised. And both of them had 
significant tranches that were 144A capital raisings, much of 
which was sourced in the U.S. markets.
    So to answer your question very specifically, it is growing 
very dramatically. And part of what is happening in non-U.S. 
markets is that a lot of those non-U.S. companies who formally 
would have come to the U.S. with registered offerings are now 
accessing the U.S. only through the 144A tract, in many cases--
and we have been told directly--to avoid the requirement to 
comply with our governance standards.
    And by the way, those are not available to retail 
investors. So on the one hand, it is protection for sure. On 
the other hand, a growing proportion of the proceeds raised and 
the availability of equity is not open or not available to 
retail investors.
    Chairman Reed. But there are many reasons why you would 
avoid registration listing, some good and some bad. So this is 
not without its----
    Ms. Culhane. It is not a simple one-size-fits-all and it is 
a complicated--I think it is a compensated topic.
    Chairman Reed. Ms. Friedman, please.
    Ms. Friedman. Thank you.
    We have been very, very interested in looking at the 144A 
trend because of the fact that NASDAQ, after 144A was created 
by the SEC, NASDAQ launched something called the PORTAL market 
which Mr. Sirri referred to earlier. And it really has been a 
dormant market for quite some time because of the fact that 
once institutions do buy these securities, they tend to hold 
them, they do not trade them. And it has been a relatively 
intransparent market. It is not something where you can look at 
a bid-ask on a security or even see the last sale price.
    So one of the things that NASDAQ has been looking at is 
relaunching PORTAL to create some transparency around the 144A 
market, making sure that that information continues to be 
available only to qualified institutional buyers, however 
making sure that it is not a completely dark market because of 
the fact so much money is being raised within the market.
    Part of the reason why more money is being raised there is 
because the fact there are a lot more institutional investors 
involved in the markets than there were back in 1990 when the 
144A was first approved.
    Chairman Reed. Thank you.
    Mr. Silvers, do you have a comment?
    Mr. Silvers. Two things about this question.
    One is that I think effectively if you look at the IPO 
market in the late 1990's for equity, the regulatory structures 
in a variety of ways had weakened to the point that we were 
effectively selling a product only fit for institutions to 
individuals. Those protections were strengthened. I think that 
that may have something to do with the then up following on 
strength of essentially an institutional market for IPOs in the 
144A equity area.
    I think there is a lot of caution, though. Professor 
Ferrell's caution about data, I think, is well taken.
    The second point I would just make about all the debate 
about IPOs and equity is that there is enormous economic growth 
into Asia. And a lot of it is being run through present or 
formal parastatal companies tied to the Chinese government. 
Those companies are now seeking to go public in certain ways 
and they are simply not comfortable, both for good and bad 
reasons, with the panoply of investor and governance 
protections we have in the United States.
    They are also, and this is completely legitimate on their 
part, they I think wish to list in place where the brokers and 
the market makers speak their language literally and that are 
geographically in proximity to them, just as large U.S. 
companies like to list here.
    We are never going to be able to, without fatally gutting 
our investor protections, seize that market. The market for 
IPOs for Chinese parastatals is going to be a Hong Kong market 
unless we choose to offer a regulatory subsidy. Meaning unless 
we choose to essentially say to them, come here and sell to 
individuals as though they were institutions.
    Now doing that is essentially subsidizing our capital 
markets at the expense of the investing public and that would 
be a really profoundly wrong thing to do.
    Chairman Reed. Thank you.
    This has been an incredibly useful hearing. I thank you all 
for your excellent testimony in response to questions.
    I would suggest, in fact announce, that we will keep the 
record open until Thursday, July 19th, for additional questions 
or statements by my colleagues and would asked if you receive a 
request for written response to respond within 10 days.
    Thank you again for excellent testimony.
    The hearing is adjourned.
    [Whereupon, at 11:45 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]

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         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 
                      FROM NOREEN CULHANE

    Q.1. A recent study found that cross-listing in the U.S. 
leads firms to increase their capital-raising activity at home 
and abroad. It concluded that ``an exchange listing in New York 
has unique governance benefits for foreign firms.'' Moving 
forward, how do we preserve this premium?

    A.1. We agree with the results of the Karolyi Study. It 
demonstrates that a U.S. listing, in addition to the home 
market, results in a valuation premium that more than 
compensates for the incremental cost of compliance with 
Sarbanes-Oxley. (See attached chart.) Global investors feel a 
new-found confidence when companies are willing to accept U.S. 
laws and regulations, and they value those companies 
accordingly.
    Our concern is that there is a tipping point where foreign 
issuers, with ever-increasing alternative options for raising 
large amounts of capital, will see the cost of accessing the 
value premium of U.S. listing as prohibitive. We have therefore 
focused our attention on regulations that add to the cost of 
compliance without a comparable benefit for investors.
    As I noted in my testimony, we have worked to lessen the 
costs associated with (1) compliance with Section 404 of 
Sarbanes-Oxley, (2) the reconciliation to U.S. GAAP and (3) 
litigation, particularly class-action lawsuits.
    1. There is a widely held view that the regulatory 
framework in the U.S. is burdensome and costly. The cost of 
internal controls reporting under Sarbanes-Oxley (SOX) has been 
the subject of much criticism in recent years. Recent SEC and 
PCAOB actions to modify what is required under Section 404 
should prove helpful in addressing this concern. This will only 
be the case, however, if the audit firms internalize the 
guidance that the SEC and PCAOB have issued; otherwise the 
regulators' rationalization of Section 404 will be ineffectual.
    2. The cost associated with reconciliation to U.S. GAAP has 
been a deterrent to listing in the U.S. We applaud the SEC for 
their proposed rules to eliminate the accounting reconciliation 
requirement by recognizing International Financial Reporting 
Standards (IFRS). This is a significant step in insuring the 
continued competitiveness of U.S. markets.
    3. The cost of litigation in the U.S., in particular class-
action lawsuits, is one of the leading deterrents to companies 
considering listing in our markets. As Senator Schumer and 
Mayor Bloomberg observed in their report, ``the legal 
environments in other nations, including Great Britain, far 
more effectively discourage frivolous litigation'' and ``the 
prevalence of meritless securities lawsuits and settlements in 
the U.S. has driven up the apparent and actual cost of 
business--and driven away potential investors.'' The need for 
litigation reform is clear and compelling.
    Since my testimony, the SEC has announced its intent to 
take a more comprehensive look at mutual recognition, beyond 
recognition of international accounting standards. As they 
explore opportunities to recognize standards met by foreign 
issuers governed by ``comparable'' regulatory regimes, there 
will be even fewer barriers to companies listing in the U.S.

    Q.2. Some broker-dealers are reportedly concerned that the 
increased leverage major exchanges may derive from exchange 
consolidations might ultimately result in them charging brokers 
higher transaction fees. It has also been suggested that part 
of the reason that a number of major broker-dealers have 
invested in small regional exchanges like the Philadelphia 
Exchange and off-exchange trading venues like BATS is that the 
investments may offer them a hedge against such fee increases. 
Would you please comment on such concerns regarding major 
exchange consolidations and their possible future impact on 
broker-dealer transaction fees?

    A.2. In general, exchange consolidation will bring system 
integration and better linkages to make for easier access and 
lower costs for customers. For example, Euronext, prior to our 
merger, integrated four markets and passed on savings to 
customers in the form of lower fees.
    In the U.S., Exchange transaction fees have only gone one 
way in recent years, down. Regulations cap exchanges 
transaction fees at $0.003 per share. The NYSE only charges a 
fraction of that at $0.0008 per share to take liquidity and we 
charge nothing to post liquidity. (This results in a round-trip 
cost of only $0.0004 per share.) Exchange transaction fees are 
a sliver of overall brokerage commissions, which are in the one 
to four cent range per share range.
    Broker-Dealers are investing in regional exchanges and ECNs 
like BATS to pressure exchanges to further drive down rates. 
BATS recently offered a $0.0034 per share rebate for posting a 
quote and charged only $0.0024 per share to take or execute 
against liquidity in the market. (This offering essentially 
paid customers $0.0010 per share to trade on BATS.) Given this 
competitive environment, there should not be any concern with 
exchange consolidation resulting in higher broker-dealer 
transaction fees. To the contrary, there should be more concern 
about below cost rebates forcing unnatural fragmentation of the 
market and the resulting inefficiencies that ultimately harm 
investors. There should also be greater concern about the 
significant growth in off-exchange trading (internalization, 
dark pools, ECNs), where the regulatory oversight is not as 
rigorous. Off-exchange trading has grown to about 24% of NYSE 
consolidated volume in October 2007 from 13% of total in 
January 2005, and the trend suggests that off-exchange trading 
will continue to grow.

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