U.S. Treasury Secretary jumps in front of parade and starts waving baton

Treasury Secretary Hank Paulson gave his long-awaited capital markets speech in New York yesterday. A copy of the speech can be read on the Treasury Department's website here. Little of what the speech discusses is new, of course. In fact, much of it has been debated in detail for nearly a decade (principles versus rules-based regulation, accounting convergence, costs versus benefits of regulation, etc.) However, given how many new proposals are in the pipe to reform post-Sarbanes-Oxley capital markets regulation (including SEC and PCAOB proposals to reform how Section 404 is implemented -- see here and here), I get the feeling that Paulson is preparing to take credit for reforms that have been in the works for quite some time.

Paulson's discussion of foreign market development, though, is worth a read. As he notes (and as I noted in this post previously), part of the shift away from New York's dominance of the IPO market comes from the growth of other non-US (and non-European) markets with high regulatory standards. This shouldn't be a surprise; if the US was getting something right in the 1990s, it's only natural that other countries would try to figure out what that was and do it themselves . This is even more the case when the United States, as a member of international groups such as the International Organization of Securities Commissions (IOSCO), goes around preaching exactly what it is that makes a capital market work well.

Nonetheless, Paulson's reference to the principles-based International Financial Reporting Standards (IFRS) as being better that US accounting standards strikes me as a little odd. Not that I disagree with this. However, as Manuel Conthe, the chairman of the Spanish securities regulator noted at last week's IOSCO Conference in London, issuers can't simultaneously demand principles-based regulation and then be upset when regulators interpret those principles in ways different than they do. That's the thing about principles: they leave a lot open to interpretation and, at least in the United States, do you really want a judge to second-guess how you've interpreted and applied an accounting principle? (Because, trust me, they will.) Arthurs Docters Van Leeuwen, the chairman of the Netherlands Authority for Financial Markets and chair of the Committee of European Securities Regulators (CESR), at the same conference also noted that, given principles avail themselves of a wide degree of interpretation, global market participants should be aware of the inherent conflict between principles and a level international playing field -- "You can have principles or you can have a level playing field, but you can't have both."

Too bad Paulson didn't attend the conference.