Speech by U.S. regulator highlights complex issues facing U.S. capital markets.
“The United States is at risk of losing its status as the world’s capital markets leader,” warned a member of the U.S. Securities and Exchange Commission (SEC) in a recent speech. His remarks outlined key challenges the U.S. financial system faces as it attempts to hold its place at the forefront of international lending.
In January, SEC Commissioner Daniel Gallagher described what he sees as several problems hurting the global competitiveness of U.S. capital markets. Gallagher, a Republican member of the five-member Commission, depicted excessive regulation as a primary cause of the waning status of the U.S as the center of international finance. He further argued that regulators often want to extend their share of control over certain markets, which he said leads to both excessive rulemaking and confused policies.
Gallagher criticized the “pro-regulatory wisdom of Dodd-Frank,” characterizing the law as an ineffective over-reaction to the 2008 financial crisis. Referring to the Dodd-Frank financial reform legislation as a “legislative monstrosity,” he asserted that excessive rulemaking has driven investors to look to “overseas markets rather than [to] the U.S. public equity markets.” Furthermore, he claimed that regulators often confuse banking regulation with capital market regulation, while the two should be regulated differently.
Gallagher cited the decline in a measure of economic freedom in the U.S. as a cause of decreased investing. He also pointed to the costs associated with civil litigation in the U.S.—including the growing threat of class action lawsuits—as a reason why investors would choose to raise funds privately or in another country, or both.
In addition to the U.S. market’s contraction, Gallagher argued that the growth of international markets has made other centers more attractive alternatives to investors. In his speech, Gallagher described actions other countries are taking to bolster their status as international financial centers. He specifically listed a number of foreign locations that are restructuring laws and focusing on building their international brand in order to become finance hubs. For example, he cited the United Arab Emirates (UAE), which has in recent years created the Dubai International Financial Centre (DIFC), with “its own legal system and courts distinct from the UAE, with jurisdiction over corporate, commercial, civil, employment, trusts[,] and securities law matters.” Over 1,100 companies are registered in the DIFC, and the UAE’s financial sector’s contribution to gross domestic product has grown more than 6% over a 10-year period.
From Shanghai and Tokyo to Turkey and the UAE, other jurisdictions have set up trade zones, eased their restrictions on foreign investments, and announced initiatives to establish themselves as international financial centers. Gallagher claimed that some Middle Eastern and Asian countries are in a better position politically to make these changes because they were not as affected by the 2008 financial crisis as the U.S. and thus did not succumb to a reactionary legislative overreach like Dodd-Frank.
Gallagher offered some potential solutions to the problems U.S. capital markets face. First, he advocated the completion of the JOBS Act Regulation A Amendments, which would substantially increase the amount of money an investor can raise in an interstate offering without having to comply with certain SEC registration requirements. He endorsed venture-exchanges, or public markets designed to benefit smaller, emerging growth companies—something that he has previously advocated. He also urged the SEC to be mindful of the cost-benefit analysis of its own rulemaking.
Gallagher’s comments come at a time when other countries are taking steps to create their own capital rather than simply rely on U.S. markets. This past summer, the BRICS states (Brazil, Russia, India, China, and South Africa) established the New Development Bank as an alternative to the U.S.-based World Bank and International Monetary Fund. Many analysts think this will change the dominance the U.S. currently holds in international lending.
At the recent World Economic Forum 2015 Annual Meeting, speakers addressed global changes that will impact international lending, such as China’s growing economy and decreased dependence on exports. The Forum also highlighted challenges to international financial growth, such as climate change, international terrorism, increasing income inequality, and unexpected volatility in commodities markets, such as oil.
Although Gallagher’s statements suggested the SEC could look to revise regulations on international lending, his fellow Commissioners may not share his view of the impact of regulations on international financial activity. Other U.S. regulators worry that risky lending behavior continues to remain high. But if Gallagher is right, then more regulation might only further complicate the challenges facing the U.S. markets.
