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50–351 2009

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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(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

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 

TIM JOHNSON, South Dakota 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT P. CASEY, Pennsylvania 

DANIEL K. AKAKA, Hawaii 

JON TESTER, Montana 

MICHAEL B. ENZI, Wyoming 

JOHN E. SUNUNU, New Hampshire 

ROBERT F. BENNETT, Utah 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

DIDEM NISANCI, Staff Director 

TEWANA WILKERSON, Republican Staff Director 

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(III) 

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 

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(1) 

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. 

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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. 

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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 

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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. 

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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 crossborder 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 surWReier-Aviles on DSKGBLS3C1PROD with HEARING

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rounding 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. 

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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 

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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. 

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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 brokerdealers. 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 

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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. 

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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. 

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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 comWReier-Aviles on DSKGBLS3C1PROD with HEARING

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petitiveness 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 

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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 

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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 

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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? 

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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 

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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-forprofit 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 SarbanesOxley. We are misaligned. But recently the SEC and PCAOB acWReier-Aviles on DSKGBLS3C1PROD with HEARING

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tions 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. 

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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. 

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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 

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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 crossborder 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 putWReier-Aviles on DSKGBLS3C1PROD with HEARING

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ting 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. 

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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 wellpublicized 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 

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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 

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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. 

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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 

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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 

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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 SarbanesOxley 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 

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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. 

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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. 

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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 

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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. 

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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 

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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. 

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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. 

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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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