SEC Chair Chris Cox and MP Ed Balls trade shots in London

Rather than the FSA's Callum McCarthy carrying London's water (as I predicted here), Member of Parliament and Economics Secretary Ed Balls (of the famous "Balls Clause") spoke as first keynote at the IOSCO Technical Committee conference in London today. Balls stated that there is a need throughout the world for a "risk-based, proportional regulation" and for others to "respect the rights of each nation to regulate its own financial services industry and the financial markets that operate in its territory as it thinks best." (Take that, America!)

Towards this end, Balls announced he was proposing today a bill in Parliament (discussed earlier here) called the "Investment Exchange and Clearing House Bill" that would give the FSA a veto power over future rules and operations that apply to UK exchanges and clearing houses, if those new rules were not "risk-based or proportional." Because, you know, industry is always imposing harsh and disproportionate regulations on itself.

The bulk of Balls' talk focused on hedge funds. Hedge fund regulation is important to the City of London because, while 70 percent of the hedge fund market is in the United States, quite a few of the funds marketing to U.S. clients are actually in the UK. Consequently, when the SEC talks about regulating hedge funds in the United States, London hears "extraterritoriality".

Yet, despite Balls' focus on hedge funds, the decision by the Deutsche Borse to rescind its offer for Euronext was a specter in the room, as was the decision by several major investment banks to form their own trading platform to avoid the high costs of conducting trades on the London Stock Exchange. This combination has put new pressure on the LSE, as it effectively now faces two new competitors -- an NYSE-Euronext merger and a new electronic trading platform being put together by its biggest customers. Unsurprisingly, shares in the LSE dropped 5.7 percent yesterday, while Deutsche Borse shares dropped 4.6 percent.

A copy of Balls' speech can be found here.

SEC Chairman Christopher Cox followed Balls with a second keynote address where he quoted Max Weber, Louis Brandeis and even French radical Jean Jacques Rousseau in warning against the "temptation for regulators to relax their standards to attract investors and issuers, at the expense of the other jurisdictions -- with the result that the overall standard of regulatory quality suffers." Cox also announced that the SEC would be introducing management guidance, to supplement new audit standards from the PCAOB, designed to radically reduce the costs to U.S. issuers of implementing Section 404 of the Sarbanes-Oxley Act.

In the weeks ahead, the U.S. will unveil significant changes to the implementation of section 404 of Sarbanes-Oxley that are designed to make it more useful for investors. Those changes will be aimed at ensuring that the internal control audit is top down, risk based, and focused on what truly matters to the integrity of a company's financial statements. They will provide guidance for both companies and their auditors to permit common sense reliance on past work, and on the work of others.

...

In 1932, U.S. Supreme Court Justice Louis Brandeis wrote that "one of the happy accidents" of a system of multiple jurisdictions is that "a single courageous state may, if its citizens choose, serve as a laboratory, and try novel social and economic experiments." Some of the experiments in regulation that we have witnessed around the world seem to have worked. Others have failed. So long as our experiments are aimed at providing high-quality investor protection, we all stand to gain. But if our experiments are guided by the desire to beggar our neighbors, we will all surely lose.

A copy of Cox's speech can be found here.