Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Regulators Shooting Their Mouth Off

Last week the Chairman of the US Securities and Exchange Commission, Mr. Christopher Cox
made a series of comments quite unbecoming of a regulator. On October 16, 2005, Mr. Cox made the following remarks before the US – China Joint Economic Committee at Hebei in China (

“Let me illustrate this point by briefly considering the upcoming IPO for China Construction Bank, which has been very much in the news here. This is simultaneously an example of what’s going right, and what more remains to be done.

The roadshow that kicked off in Hong Kong a week and a half ago was a success. And there’s a strong likelihood that CCB will be heavily oversubscribed. For that, China deserves congratulations.

We’d be kidding ourselves, however, if we didn’t recognize that CCB could have done even better if it had been listed in New York rather than Hong Kong.

We’d also be foolish not to notice that even with the success of the CCB’s roadshow, there’s now speculation in the press about the health of its balance sheets; how many of CCB’s existing loans will become non-performing; and how much management has really changed.

Perhaps, the exacting process of listing on a U.S. exchange would have helped CCB avoid these concerns, which go directly to the question of investor confidence. Of course that process would be expensive and time consuming. But no one should pretend that the avoidance of strong securities laws and tough enforcement, which is admittedly cheaper on the front end, isn’t more expensive in the long run.”

Two days later, in remarks before the Securities Industries Association/Tsinghua University Conference on October 18, 2005 in Beijing, Mr. Cox was more circumspect in raising the same issue (

“But it would appear that many other Chinese companies are seeking to avoid higher regulatory standards by not listing in the U.S.

This year, there has been a significant drop in the amount of money Chinese companies have raised in the United States as compared to last year.

The truth is, no honest company need worry that the bar is too high to list in America. It is precisely because our markets are the gold standard that listing in the U.S. remains the benchmark of investor confidence for companies around the world.

Going through the listing process in the U.S. will improve Chinese company disclosure practices. And this will serve to achieve China’s objective of upgrading the governance of its firms. That, in turn, will benefit every investor, saver, and worker in China.”

Even these later comments may appear too self laudatory to some, but they are not objectionable. The comments of October 16 on the other hand, are completely unbecoming
of a regulator:

  • Mr. Cox casts aspersions on a company about which he has no knowledge as a regulator. Since CCB never filed any documents with the SEC, whatever he says about it is mere hearsay.
  • Mr. Cox is lending the SEC’s credibility to market gossip by
    saying that it would be foolish to ignore this gossip.
  • Mr. Cox’s remarks are more like that of a trade envoy trying to persuade
    everybody to buy American goods and services than that of a fair and impartial regulator.

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