WEBMASTER NOTE: This is the unedited transcript of the Roundtable on the International Financial Reporting Standards "Roadmap" held on March 6, 2007, which we received directly from the court reporter. We are posting the transcript in this form to make it available as soon as possible. 1 THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION 2 3 4 5 6 INTERNATIONAL FINANCIAL REPORTING STANDARDS 7 ROADMAP ROUNDTABLE 8 9 10 Tuesday, March 6, 2007 11 10:00 a.m.- 5:30 p.m. 12 13 14 United States Securities and Exchange Commission 15 100 F Street, Northeast 16 Washington, D.C. 17 18 19 20 21 22 23 24 Diversified Reporting Services, Inc. 25 (202) 467-9200 1 C O N T E N T S 2 PAGE 3 Call to Order 3 4 5 Introductions by Professor Hal Scott 5 6 7 Opening Remarks by: 8 Christopher Cox, Chairman, 8 9 U.S. Securities and Exchange Commission 10 11 Charlie McCreevy, European Commissioner 22 12 for the Internal Market and Services 13 14 Panel 1: Effect on the Capital Raising Process 31 15 in the U.S. Capital Markets 16 17 Panel 2: Effect on Investors 98 18 in the U.S. Capital Markets 19 20 Panel 3: Effect on Issuers 167 21 in the U.S. Capital Markets 22 23 Closing Remarks 227 24 25 1 P R O C E E D I N G S 2 MR. WHITE: Good morning. Welcome to the SEC 3 staff's Roundtable on International Financial Reporting 4 Standards, or IFRS, and their effect on U.S. capital markets. 5 I am John White, director of the Division of 6 Corporation Finance. And on behalf of Ethiopas Tafara, 7 director of the Office of International Affairs; Conrad 8 Hewitt, the Commission's chief accountant; and myself, I want 9 to thank all of the panelists and the public audience for 10 being here today for this important program. 11 Our principal goal today is to obtain input on the 12 potential effects of a coexistence without reconciliation of 13 the IFRS and U.S. GAAP reporting models on the various 14 participants in the U.S. capital markets. And I would like 15 to begin by outlining what we have planned for the rest of 16 the day. 17 First, SEC Chairman Chris Cox will share with us 18 his thoughts on the roadmap to ending reconciliation. 19 His comments will be followed by remarks by 20 European Commissioner of the Internal Marketing Services, 21 Charlie McCreevy. 22 Chairman Cox and Commissioner McCreevy will be 23 introduced by Professor Hal Scott, the Nomura professor and 24 director of the Program on International Financial Systems at 25 the Harvard Law School. Professor Scott has taught at the 1 law school for over 30 years. His courses include capital 2 markets regulation, international finance, and securities 3 regulation. He is also a director of the Committee on 4 Capital Markets Regulation. 5 After Chairman Cox's and Commissioner McCreevy's 6 remarks, we will then move directly to the first of three 7 roundtable panels that will look at the effects of 8 reconciliation and the possible elimination of reconciliation 9 on the capital raising process in the United States. 10 We will then take a break at approximately 12:30. I 11 should point out that, if you are looking for lunch, there 12 are a number of places in Union Station, both sit-down 13 restaurants, and there is a large food court downstairs. You 14 go back out the same way you came in. Go through security, 15 take a right, and you will have to come back through security 16 when you come back in the afternoon. 17 Our second roundtable panel will begin at 1:45, and 18 it will focus on the effect on investors in the U.S. capital 19 markets. That should go until about 3:30. 20 We will take a 15-minute break. 21 And then our third and final panel will begin at 22 3:45 and will focus on the effects on issuers, both foreign 23 and domestic. 24 And we are particularly fortunate to have on the 25 final panel Don Nicolaisen, the former chief accountant of 1 the SEC, who, in April of 2005, first described the roadmap 2 for eliminating the requirement for non-U.S. companies to 3 reconcile to U.S. GAAP the financial statements they prepare 4 using IFRS, as issued by the International Accounting 5 Standards Board. 6 We expect to conclude this roundtable at around 7 5:30. 8 Now, I was also handed this long sheet of paper 9 about how to evacuate this building in case of emergencies. 10 And I'm not going to read the whole thing through, but there 11 are exits in back, there are exits on the side. There are 12 all kinds of directions when you go those places, if you have 13 to evacuate. If there is a shelter-in-place incident, stay 14 here, and we will give you additional instructions. 15 I hope, Chairman Cox, that I got that all right. 16 With that, I will turn it over to Professor Scott. 17 PROFESSOR SCOTT: Thank you. It is an honor and a 18 pleasure to introduce today two men who are, separately and 19 together, making key contributions to ensuring that we have 20 the right regulatory framework for the global financial 21 system for the 21st Century. 22 One of the most important features of this system 23 -- perhaps even the most important -- is the accounting 24 system. A global financial system ultimately requires, in my 25 view, a global accounting framework, whether this is to 1 achieved by a single set of rules, or through mutual 2 recognition, or choice among a few of the best rules. 3 The EU and the SEC have taken an important step in 4 this direction by a commitment to a roadmap under which the 5 U.S. would accept IFRS by 2009 -- which, as you know, is the 6 Europe accounting standard -- and the EU would continue to 7 accept U.S. GAAP. 8 An important issue in meeting this objective is to 9 understand the impact of differences in the two standards. We 10 should learn a lot about this from the IFRS-U.S. GAAP 11 reconciliations now being filed in the U.S. The differences 12 between these two standards should continue to narrow as a 13 result of the FASB-IASB convergence project. 14 Equally important is to gain an understanding as to 15 how IFRS will be enforced in the EU member states and 16 elsewhere where it has been adopted. The acceptance of IFRS 17 in the U.S. will be an important change, and it is incumbent 18 that there be open and serious discussions between now and 19 2009 as to how this will actually work. 20 Accounting standards may be arcane to some, but 21 they are the bedrock of the financial system and, ultimately, 22 the economy as a whole. 23 The Committee on Capital Markets Regulation, which 24 I am privileged to serve on, made a number of recommendations 25 for improving the competitiveness of the U.S. capital 1 markets. Fortunately, given the roadmap, we did not need to 2 advocate U.S. recognition of IFRS. However, it should be 3 kept in mind that permitting foreign companies to use IFRS to 4 lower the costs of foreign companies publicly issuing their 5 securities in the U.S. can allow U.S. investors to invest in 6 these securities under U.S. disclosure rules. 7 Let me now introduce our principals. 8 Commissioner McCreevy is the European commissioner 9 for the internal market, a position he has held since 2004. 10 Prior to that time, he served in a number of positions in the 11 Irish government, including minister of finance. 12 He has championed many internal market reforms 13 within the EU to perfect the achievement of a single market, 14 including the Prospectus, Transparency, and MiFIA Directives. 15 He has also been instrumental in greatly improving the law 16 and regulatory process for the EU. 17 He was instrumental in the creation of the roadmap 18 in April 2005 and its reconfirmation at his meeting with 19 Chairman Cox in February of 2006. He has made further 20 integration of the EU and U.S. capital markets a major 21 priority. 22 And let us not forget that he is a member of the 23 Institute of Chartered Accountants. 24 Chairman Cox, after a distinguished career in the 25 U.S. Congress, became the chairman of the SEC in August of 1 2005. 2 Since coming here, Chairman Cox has been 3 instrumental in pursuing a consensual approach of the 4 Commission to the resolution of a number of controversy 5 issues -- for example, the Commission's policy on civil 6 penalties. 7 Like Commissioner McCreevy, Chairman Cox has 8 demonstrated his commitment to the development of capital 9 markets. The current Commission proposals on deregistration 10 and the implementation of Section 404 of Sarbanes-Oxley have 11 been responsive, in part, to European concerns, as well as 12 the competitive position of the United States. The Chairman 13 has led the way in showing that investor protection and 14 increased U.S. competitiveness can both be achieved through 15 the right combination of sound policies. 16 And I would be remiss if I didn't note that 17 Chairman Cox received an MBA from Harvard Business School 18 and, more importantly, a JD from Harvard Law School. 19 We in the world are fortunate to have these two 20 talent and dedicated leaders. Thank you. 21 CHAIRMAN COX: Thank you very much, Hal. I want to 22 join in welcoming everyone that is here -- and some that 23 aren't, because others will be able to participate in these 24 proceedings remotely or by our publication and transmission 25 of all that goes on here today. 1 I want particularly to point out that I am joined 2 here this morning by two of my fellow Commissioners, Roel 3 Campos and Kathleen Casey. And, throughout the day, all of 4 the members the Commission will be here because of the 5 importance that we attach to what we are talking about this 6 morning at the SEC's Roundtable on our International 7 Financial Reporting Standards Roadmap. Oh, and Commissioner 8 Nazareth is already here, as well. So we are almost at full 9 strength right now. Perhaps we should call a quick vote. 10 Today's forum is focused both on next steps and on 11 looking back at where we have been. It has been two years 12 since our then-chief accountant, Don Nicolaisen, first laid 13 out the roadmap, which, as Hal pointed out, I endorsed as 14 Chairman, just a few months later. 15 But this has been a much longer journey than that. 16 Eleven years ago, in the National Capital Markets Efficiency 17 Act, the Congress directed the SEC to give vigorous support 18 to the development the high-quality international accounting 19 standards as soon as practicable. 20 Four years later -- in February 2000 -- the SEC 21 issued a concept release that solicited comment on whether we 22 should consider accepting IFRS in the United States. 23 Two years after that, when Enron and the wave of 24 the accounting scandals that followed called into question 25 the intensely rule-based approach of U.S. GAAP, Congress 1 again urged us to take action. In Section 108(d)(1) of the 2 Sarbanes-Oxley Act, the SEC was directed to study, quote, 3 "the adoption by the United States of a principles-based 4 accounting system." SOX expressly required that we examine 5 the length of time that would be necessary to change from a 6 rule-based to a principles-based financial reporting system. 7 And so, in 2002, with the SEC's express support, 8 the FASB and the IASB began in earnest to achieve short-term 9 convergence between their respective sets of accounting 10 standards. 11 In the Norwalk Agreement that was struck between 12 the FASB and the IASB in September of 2002, the respective 13 boards agreed to work toward making their existing financial 14 reporting standards fully compatible "as soon as is 15 practicable." Those were the words in the Norwalk Agreement 16 -- the phrase that was used by Congress in the National 17 Capital Markets Efficiency Act. 18 That same year, the European Parliament and the 19 Council of the European Union determined that all listed 20 European companies -- including banks and insurance companies 21 -- would have to prepare their consolidated financial 22 statements using IFRS beginning in 2005. 23 So when the roadmap was laid out two years ago, we 24 had already covered a lot of ground. 25 The roadmap commits us to eliminating the current 1 U.S. GAAP reconciliation requirement, with the result that 2 eligible firms listing on U.S. exchanges could choose whether 3 to report under IFRS or U.S. GAAP. And if an issuer chose 4 IFRS, it would not be required to reconcile the differences 5 with GAAP, just as, today, issuers reporting under U.S. GAAP 6 are not required to reconcile the differences with IFRS. 7 Once it was unveiled, the roadmap took on a life of 8 its own. Governments, regulators, and standard setters 9 around the world have been relying on it to determine their 10 actions. We are committed to this process, and we are not 11 looking back. 12 Have you ever tried to re-fold a roadmap? It's not 13 pretty. Not only is it impossible to divine which side folds 14 where, but, usually, we undertake this while the car is in 15 motion, while the driver is yelling, and probably while you 16 are not entirely sure if you are on the right track 17 -- because, otherwise, you wouldn't need a map in the first 18 place. 19 So we are not going to re-fold the map or try to 20 stuff it, all mutilated, back into glove box. I am here to 21 tell you, as I have said before, that I and the SEC are 22 committed to the roadmap. 23 And, in that regard, I would like particularly like 24 to welcome EU Internal Markets Commissioner Charlie McCreevy 25 because I know that he, too, and the EU are, likewise, 1 committed to the roadmap. 2 As the world securities markets continue to 3 integrate, it is easy to imagine that this process is 4 inevitable, inexorable, somehow impelled by forces of nature. 5 But everyone in this room knows that you all bear a special 6 burden. It's a lot of work, every day, to make this 7 happen -- to turn that vision of seamless integration into 8 reality. 9 As issuers and investors increasingly look beyond 10 their borders for opportunities to invest or to raise 11 capital, it is critical that the financial information that 12 they use to make their decision be both accurate and timely. 13 One of the obstacles that investors have to 14 overcome in making their investment decisions is the 15 different ways that information might be presented to them. 16 Sometimes the differences are due simply to the happenstance 17 of the country in which an issuer happens to find itself. 18 That's why virtually everyone -- issuers, investors, 19 stakeholders of all kinds -- agree that the world's capital 20 markets would benefit from the widespread acceptance and use 21 of high-quality global accounting standards. 22 The rationale for a global standard, instead of the 23 babble of competing and sometimes contradictory national 24 standards, has been often stated. But it is so important 25 that it bears repeating: Global accounting standards would 1 improve investor confidence in the market, so long as the 2 standards are high quality, comprehensive, and rigorously 3 applied. 4 They would allow investors to draw better 5 comparisons among investment options. They would also lower 6 costs for issuers, who would no longer have to incur the cost 7 of preparing financial statements using different sets of 8 financial reporting standards. And those lower costs, in 9 turn, would benefit investors, who ultimately bear the burden 10 of the entire cost of the financial reporting system. 11 The purpose of today's roundtable on the roadmap is 12 to consider the possibility that IFRS and U.S. GAAP might 13 coexist in U.S. capital markets and to assess the impact that 14 this would have on capital markets in the U.S., on the 15 decisions that investors make, and on our program of investor 16 protection. 17 Not only the European Union, but also many other 18 nations -- including Canada, Australia, New Zealand, Israel, 19 China, and Hong Kong -- are adopting IFRS. And so, without 20 question, it is becoming a widely used set of standards. 21 But we shouldn't forget that it is also a new set 22 of standards. IFRS has existed as a truly comprehensive set 23 of accounting standards for only a few years. And because of 24 that relative newness, it necessarily has a limited history 25 of interpretation and application. We are all now engaged in 1 the exercise of ensuring that IFRS is being applied 2 consistently, faithfully, and transparently. 3 This exercise is of importance, of course, to our 4 friend in the European Community because consistency and 5 faithfulness in the interpretation and application of IFRS 6 are critical to the creation of a seamless integrated capital 7 market comprising the EU's 25 member states. 8 The exercise is also of critical importance to us 9 here at the SEC. Allowing the use of two different sets of 10 accounting standards in the United States would mark a 11 significant change for us, but allowing two standards is a 12 nothing compared to allowing two dozen. And, for that 13 reason, we have got to be able to demonstrate that IFRS is 14 indeed a single set of international accounting standards and 15 not a multiplicity of standards going by the same name. 16 It is the premise of the roadmap that, if we can do 17 this, that the potential benefits to U.S. investors of 18 allowing the use of IFRS in the United States almost 19 certainly outweigh the risks and the costs. 20 These benefits include increased investor access to 21 foreign investment opportunities and entry into the U.S. 22 capital markets by issuers that might otherwise be deterred 23 from listing here because of cost of reconciling their 24 financial statements to U.S. GAAP. 25 The risk, by contrast, is not that IFRS isn't of 1 high enough quality to provide U.S. investors with adequate 2 information about the companies in which they invest, but, 3 rather, that financial statements prepared using IFRS might 4 not be comparable with one another because of a lack of 5 consistent, uniform application. 6 That imperative of consistent application and 7 interpretation depends on policy makers, on governments, on 8 issuers, and on accountants. Regulators, such as the 9 Securities and Exchange Commission, also play a role because 10 it is our job to review financial statements, whether they 11 are filed using IFRS or U.S. GAAP, to see whether the 12 accounting standards are being applied consistently and 13 faithfully. 14 Last summer, we saw the first wave of filings by 15 non-U.S. companies using IFRS. While the number of IFRS 16 filings was smaller than we had expected it would be, those 17 that we did receive were helpful in orienting us to the kinds 18 of issues that we can expect to see as number of filings 19 rises over the next few years. 20 While these were the first IFRS filings we have had 21 the opportunity to review, the SEC has long been in the 22 business of reviewing filings by foreign private issuers. The 23 kind of review that the SEC staff has done of these first 24 IFRS filings is the same that we have done for years for 25 filings reconciled to U.S. GAAP. 1 But, given the relative newness of IFRS, the staff 2 of the Office of the Chief Accountant and the Division of 3 Corporation Finance have worked hard to understand the new 4 standards and how issuers are using them to state their 5 financial results. 6 The initial comments of staff reviewing these 7 filings are most appropriately described as 8 information-seeking. They are not intended to be conclusions 9 about the application of IFRS. They are instead meant to be 10 an effort to better understand things that might be unclear, 11 or call attention to things that may be omitted. 12 I want to emphasize that the staff's comment 13 letters should not be viewed as an attempt to straight-jacket 14 the interpretation of IFRS, or to make it a more rules-based 15 and less principle-based system. It's one thing to say that 16 IFRS should be interpreted and applied consistently and 17 another thing to say that it should be stripped of its 18 flexibility business and its essential principles-based 19 nature. 20 One of America's early icons, a rough-and-tumble 21 frontier lawyer, who Tennessee's first Congressman, once 22 memorably said that, "It's a damn poor mind indeed that can't 23 think of at least two ways to spell the same word." 24 Old Hickory, as he came to be known, was our 25 seventh President, and Andy Jackson's folk wisdom is 1 appreciated today by some of the great Americans who work in 2 the Division of Corporation Finance and the Office of the 3 Chief Accountant. They know as well as anyone that, the same 4 way that a poem or a short story or a novel or a play is 5 subject to multiple interpretations, so are the standards set 6 forth in IFRS, even if accounting standards don't often rise 7 to the level of poetry. 8 But just as is it true that any piece of literature 9 can be subject to multiple interpretations, it is also true 10 that some interpretations can be incomplete, or just wrong. 11 For example, an essay on Moby Dick that doesn't mention the 12 whale may raise questions that the writer has perhaps missed 13 something important. Or when an essay on Hamlet begins with 14 the statement that Lady Macbeth is the key to understanding 15 the play, we know that something has gone terribly wrong. 16 So while there may be more than one reasonable 17 interpretation or understanding, that interpretation or 18 understanding has to be susceptible to explanation. And a 19 comment letter that asks for more detail or greater 20 explanation doesn't mean that the SEC is trying to impose its 21 own interpretation. We and others around the world will 22 instead be focusing on a shared understanding of the 23 principles of IFRS. 24 To this end, the SEC and the Committee of European 25 Securities Regulators have entered into a joint work plan to 1 further the consistent and faithful application of accounting 2 standards. 3 The work plan provides a forum in which the SEC and 4 the EU regulators can discuss questions about the application 5 of accounting standards. The work plan helps foster 6 consistency and faithfulness by helping regulators to avoid 7 conflicting decisions. 8 The process is very much collaborative, and it 9 recognizes that, by their very nature, neither IFRS nor U.S. 10 GAAP is the exclusive purview of a particular regulator, but, 11 rather, they are public goods for the common benefit of many. 12 By consulting with each other, the SEC and the CESR staff can 13 help ensure that high-quality global accounting standards are 14 consistently interpreted and faithfully applied. 15 At the same time, FASB and the IASB have embarked 16 on a project to converge accounting standards, which, as I 17 noted, was formalized in the Norwalk Agreement. Over the 18 past few years, these efforts have gone far to reduce 19 differences between the two sets of standards. And, by all 20 accounts, they have improved both IFRS and U.S. GAAP in the 21 process. 22 But accounting standards are complicated, and this 23 process can be difficult. And that inherent difficulty has 24 led some to the view that the convergence of IFRS and U.S. 25 GAAP is ultimately impossible; thus, rendering the 1 elimination of the reconciliation requirement an eternally 2 unattainable goal. 3 So let me repeat that we don't expect to see total 4 convergence, or even a specific level of convergence, before 5 eliminating the reconciliation requirement. Instead, there 6 must be a robust and active process for converging IFRS and 7 U.S. GAAP. If the process is in place, then the current 8 differences will be minimized in due course. 9 This is hard work, but the benefits for investors 10 in our markets, if we are successful, are enormous. 11 Convergence of IFRS and U.S. GAAP will allow the United 12 States and markets around the world to capitalize on the 13 benefits of a single set of globally-accepted accounting 14 standards. And the process of reducing the differences 15 between IFRS and U.S. GAAP gives us the opportunity at the 16 same time of taking both to the highest-quality level. That's 17 why the SEC originally committed to the roadmap and why, 18 years later, we are still committed. 19 That original commitment was enormously 20 consequential because it implied a great deal. It meant that 21 IFRS and U.S. GAAP would some day compete freely in America's 22 capital markets, and that two accounting systems would 23 operate side by side -- at least, until the process of 24 convergence concludes with actual convergence and there is 25 truly one global accounting standard and seamless 1 international comparability in reporting. 2 It meant that issuers, markets, and investors would 3 have a choice because they -- not the government -- could 4 decide between IFRS and U.S. GAAP. 5 And it meant that the SEC was seriously 6 contemplating a system in which, not only foreign issuers, 7 but also domestic issuers, will have that choice. 8 Most importantly, it meant that the work of 9 standard setters toward convergence of the two systems that 10 is ongoing here in the United States, at the IASB, and in 11 every nation that is implementing IFRS will not be of 12 infinite duration. 13 As the name implies, the roadmap has a destination 14 and an estimated time of arrival. We are now less than two 15 years away from our planned arrival at the intended 16 destination. Whether or not complete conversion is 17 susceptible of practical implementation in the short term, 18 the elimination of the present reconciliation requirement is 19 not dependent upon the FASB and the IFRS resolving all major 20 differences between their regimes. As I said, rather, it 21 requires sustained progress toward that goal. 22 It is a significant implication of the roadmap 23 that, once the reconciliation requirement is lifted, there 24 will be no incentive for delay in truly converging IFRS and 25 U.S. GAAP. 1 The roadmap isn't an article of faith. It's a 2 plan -- nothing more or less. And just as with the garden 3 variety roadmap, every once in a while, it pays to stop and 4 ask questions about the particular route that we have chosen 5 answer. And that is why we have convened this distinguished 6 group of panelists today, drawn from those who play a vital 7 role in the capital raising process. 8 We are interested in multiple points of view -- 9 from issuers, accountants, investors, credit rating agencies, 10 investment bankers, lawyers, and directors. Because all of 11 these people -- all of you -- are observing this process 12 firsthand, you are the experts. We aim to be empiricists and 13 to learn from your experience. 14 Twenty-three centuries ago, Aristotle concluded 15 that heavier bodies fell faster than lighter ones because it 16 seemed logical that they would. For almost two millennia 17 afterward, just about everybody believed that that was true, 18 not only because it seem logical to them, as well, but also 19 because Aristotle had said so. It was not until Galileo 20 constructed a carefully conceived series of experiments and 21 meticulously observed and reported the results was it proved 22 once and for all that bodies fall at the same rate of speed, 23 whatever their weight. 24 And as important as that discovery was, the far 25 more important consequence was the triumph of empirical 1 observation over ivory tower analysis -- or, as the great 2 American sage and New York Yankee legend Yogi Berra, an 3 unheralded empiricist, once said, you can observe a lot just 4 by watching. And you can learn a lot just by listening. 5 As a matter of theory, the benefits of eliminating 6 the reconciliation requirement seem reasonable and logical. 7 What remains to be determined is whether those benefits can 8 be and will be achieved in practice. 9 That is the reason the SEC is hosting this 10 roundtable and why, as Yogi might put it, it is now my turn 11 to observe by watching. 12 Thank you to all of our panelists and presenters 13 who are here today. I look forward to what will surely be an 14 illuminating discussion. I know that we will accomplish a 15 lot of good today. 16 MR. MCCREEVY: Firstly, thank you, Chris, for the 17 invitation to take part in this roundtable. And also thanks 18 to you, Professor Scott, for your very kind words of 19 introduction and for you own pioneering work over many years. 20 Now, this is all further proof of the close and 21 effective cooperation the SEC and the European Commission 22 have established. I am very pleased about what we have 23 already achieved together. It is of great practical 24 importance to all of our citizens and to our businesses, and 25 I would like to commend you on your leadership. 1 Capital markets are global. Our financial markets 2 are becoming ever more close to integrations and can no 3 longer be viewed in isolation. Global markets, the global 4 standards, and global regulatory cooperation -- this is the 5 only way to ensure proper investor protection and to promote 6 transparency and efficiency. 7 We are destined to work together more, on 8 securities regulation, banking, insurance, and so on. I note 9 that the G7 finance ministers, in Essen last month, urged 10 that we should now, and I quote, "explore free trade in 11 securities based on mutual recognition of regulating 12 regimes." That is a major step up. 13 Some years ago, the European Union was faced with a 14 situation where our financial reporting practices no longer 15 met the requirements for building and integrating European 16 capital markets. We had to rethink our goals, and we decided 17 to move for international financial reporting and accounting 18 standards. That move, we think, was bold and visionary. 19 The changeover to IFRS has not come easy. It has 20 taken a lot of time and a lot of money for 8,000 or so listed 21 companies to adapt to the new accounting environment. 22 Analysts and shareholders have had to learn how react to new 23 financial information. 24 But I am very pleased to be able to say today the 25 move towards IFRS has been going well. The feedback we get 1 is generally positive. Studies of IFRS accounts have shown 2 that the overall quality of the accounts and the disclosures 3 have improved. 4 Of course, the introduction of 40 new standards, 5 plus interpretations, has given rise to some application and 6 interpretative issues. Most of these have been dealt with at 7 company level, by auditors or regulators. And this is how it 8 should be in a principles-based system. Robust and 9 understandable principles should be handled and use by 10 skilled professionals. To sift out any more complex 11 problems, we have set up a roundtable to assist in 12 interpretation. 13 Cooperation between regulators on both sides of the 14 Atlantic is also crucial for the smooth introduction and 15 enforcement of IFRS. In the global market, only regulators 16 working closely together can ensure adequate investor 17 protection. I am very pleased to see the increased level of 18 contacts and the joint work between Committee of European 19 Securities Regulators -- which trades over the imperious 20 title of CESR -- and the SEC. 21 The work done between CESR and the SEC is an 22 important step within the roadmap of facilitating cooperation 23 between regulators. This cooperation is crucial in order to 24 ensure consistent application and enforcement by IFRS and 25 U.S. GAAP and to avoid any conflicting regulatory positions 1 on the application of IFRS. We need to be open towards each 2 other and to exchange information at every stage and to do so 3 frequently. There is still work to be done, but I am 4 confident we are on the right track. 5 Since we in Europe took the decision to use IFRS, 6 more than 100 jurisdictions around the world have decided to 7 require or to allow IFRS. The United States has taken 8 significant steps in this direction. I am convinced 9 accepting IFRS without reconciliation in the U.S. capital 10 markets will have very positive effects. It will bring more 11 openness to capital markets, it will benefit U.S. investors, 12 it will facilitate access for third country issuers into the 13 United States financial markets, and also contribute to a 14 more coherent global regulatory structure. 15 And let me underline this: This is in the U.S. 16 interest, just as it is in ours, and can and will be done in 17 a way that will benefit and safeguard U.S. investors. 18 I fully subscribe to the conclusions of the Capital 19 Markets Competitors Group that Professor Scott chaired, the 20 Bloomberg-Schumer-McKenzie report, and the speech of Treasury 21 Secretary Hank Paulson -- all calling for convergence of 22 accounting standards and a more principles-based approach to 23 regulation. 24 In the long term, it is crucial that we receive 25 substantial convergence in IFRS and U.S. GAAP, the world's 1 most important accounting frameworks. I welcome the efforts 2 made by the standard setters in FASB and the IASB to develop 3 accounting standards for worldwide use. 4 But this does not mean that IFRS and U.S. GAAP 5 should be identical. The differences should be narrowed down 6 so that investors can understand the financial statements 7 prepared under the different accounting frameworks. 8 The convergence process should improve the 9 information available to investors, with the opportunity to 10 replace weaker standards with stronger ones. However, any 11 new standards must be introduced in such a way that there 12 will be a stable framework of rules that users and preparers 13 can learn to apply in an orderly fashion. We need a period 14 of accounting stability and predictability, not a palace 15 revolution every day of the week. 16 While standards setters are continuing on the 17 conversion process, we should also have short of short-term 18 benefits. Therefore, we need to work on mutual recognition 19 and equivalence of accounting rules between the United States 20 and the European Union. 21 Last year, Chairman Cox and I confirmed our mutual 22 commitment to removing the reconciliation requirements for 23 IFRS and U.S. GAAP. I am happy that good progress has been 24 made since then. 25 In the European Union, we took a decision to 1 continue to permit listings on the basis of statements 2 prepared according to the United States and a number of other 3 GAAPs until 2009. This aligns the EU timetable with the SEC 4 roadmap. 5 Next year, both the SEC and the European Commission 6 have to take crucial decisions. I am convinced that we will 7 achieve a positive result. This is a win-win situation for 8 the United States and the European Union. 9 And I think the principle of equivalence can also 10 be applied in fields beyond accounting. This morning, PCAOB 11 Chairman Mark Olson and I have agreed to deepen EU-U.S. 12 cooperation on other regulation. 13 The starting point for cooperation between 14 oversight bodies should be the whole country principle. This 15 is why we have agreed today to launch roadmap discussions on 16 equivalence of our respective auditing systems. We want to 17 move towards full reliance on our respective public oversight 18 systems in the same spirit as in accounting. 19 This does not require standards and systems to be 20 identical, but robust enough to ensure investor confidence, 21 robust enough for each us to have confidence in each other. 22 We must also work to find a way to narrow down differences in 23 auditing standards. The aim is to have, by 2009, inspections 24 of audit firms carried out by the home country public 25 oversight body, not by host country inspections, which are 1 legally and organizationally very cumbersome. 2 Now, this agenda is ambitious, and we will need to 3 work hard to achieve it. But I am confident, and I think we 4 can built on the experience we have gained in the are of 5 accounting. 6 And let me also say that these two areas 7 -- accounting and auditing -- are the outriders, the 8 precursors to much deeper EU-United States cooperation, as 9 Chancellor Merkel of Germany is hoping to build with her 10 trans-Atlantic initiative. 11 To conclude, global capital markets are a reality. 12 Regulators have to adapt their structures and thinking to 13 this reality. The convergence of accounting standards 14 removes differences so the investors can understand different 15 financial statements and make similar investment decisions, 16 regardless of whether accounts are prepared under IFRS or 17 U.S. GAAP. 18 While this process is going on, regulators in the 19 United States and the European Union must already take two 20 important steps. One, deepen their corporation to ensure 21 consistent application and enforcement of the accounting 22 standard, their confidence in each other, and to trust each 23 other; and, two, eliminate costly reconciliation 24 requirements. 25 This will create a real win-win situation, will the 1 removal of barriers and unnecessarily costs to give better 2 access for funding, lead to lower cost of capital, and boost 3 our economies on both sides of the Atlantic, towards a 4 friction-free trans-Atlantic capital market, which is no less 5 than 70 percent of the global total. 6 The prize is within our grasp, so we must reach out 7 and take it. Thank you very much. 8 MR. WHITE: Thank you, Chairman Cox, Commissioner 9 McCreevy, Professor Scott, for being here and setting the 10 stage for today's roundtable. 11 We are now going to move directly to our first 12 panel, if everyone can come up. Thank you. 13 (Panel members come forward.) 14 MR. WHITE: Thank you. Before we actually start 15 this panel, a couple of preliminary matters. 16 First, we have joining us on this first panel two 17 of our SEC Commissioners, Annette Nazareth and Roel Campos. 18 I know, from talking with both of them, that they have a very 19 keen interest in this topic, and I am very pleased that they 20 could join us for this first panel. We will actually have a 21 number of Commissioners coming and going during the course of 22 the day, but they are here for the first panel. 23 The one Commissioner you will not see today is 24 Commissioner Atkins. He is actually in California today as 25 part of the Commission's program to promote investor 1 protection for the men and women in our armed services. But 2 he did specifically ask me to convey how important today's 3 topic is to him and his strong support for our efforts in 4 this area. 5 Let me also point out that today's program is being 6 video-cast on the Commission's website and will be available 7 through the archive after today. There will also be a 8 transcript of today's proceedings showing up on the 9 Commission's website. 10 The rules of the road for our panels today are, 11 really, fairly simple. Each panel will have two moderators. 12 The lead moderator will introduce the panelists. I'll play 13 that role for the first panel. 14 My co-moderator for this panel will be the 15 Commission's chief accountant, Conrad Hewitt. Conrad joined 16 the Commission staff last August and brings a wealth of 17 experience and a diversity of perspectives to today's topic. 18 Conrad and I will also be moderating the third 19 panel this afternoon. 20 Before I introduce the panelists, let me lay out a 21 couple of the rules of the road for the -- for all three 22 panels, actually. 23 We have asked the panelists not to make any opening 24 statements. And, in fact, we will actually direct certain 25 questions to the panelists, but we then encourage any of the 1 panelists who would like to comment to please do so. 2 The way we would like you to be recognized is to 3 turn your tent card up on end, like this. Then, if Conrad and 4 I are in the mood and we like what we think you are going to 5 say, we will call on you. If not, we will think twice about 6 it. But that's how you, at least, get our attention. I 7 guess we will ask the Commissioners to follow the same 8 procedure, although you can interrupt if you want. 9 So let me introduce the panelists for the first 10 panel. 11 Starting on the far left, Richard Blackett. Mr. 12 Blackett is the head of the International Equity Capital 13 Markets Group at Citigroup, where he has worked for 24 years. 14 He described himself to me that he had worked on almost every 15 international offering underwritten by Citigroup since 1993. 16 So I am quite pleased and impressed that we have Mr. Blackett 17 with us today. 18 Neri Bukspan is a managing director with Standard & 19 Poor's Credit Market Services. He is S&P's global chief 20 accountant and is responsible for providing direction on the 21 manner in which financial statement information is analyzed 22 and incorporated into S&P's rating considerations. 23 Nick Grabar. Mr. Grabar is a partner in the New 24 York office of the international law firm of Cleary, 25 Gottlieb, Steen & Hamilton. His practice focuses on 1 international capital markets and securities regulation. He 2 has also served in their Paris office. 3 Dave Kaplan. Dave has over 30 years of experience 4 with the international audit firm of PricewaterhouseCoopers. 5 He is currently the leader of PwC's International Accounting 6 and SEC Services Group. 7 Roberta Karmel. Professor Karmel is the Centennial 8 Professor of Law and co-director of the Center for the Study 9 of International Business Law at Brooklyn Law School. She 10 served as a Commissioner of the SEC from 1977 to 1980 -- but 11 not in a room as nice as this, as far as I know. I don't 12 think it was quite like this. And she was also a public 13 director of the New York Stock Exchange for six years. 14 And speaking of the York Stock Exchange, we have 15 Cathy Kinney. Ms. Kinney has been with the New York Stock 16 Exchange for approximately 33 years, if I understand it 17 correctly, and is currently serving as its president and 18 co-chief operating officer. 19 And, interestingly, among the many perspectives 20 that she brings today is that she is recently going through 21 the process of being a U.S. public company merging with 22 Euronext -- a different perspective than we are used to 23 having from our New York Stock Exchange representative. But I 24 hope she will share some thoughts on that with us. 25 Next, we have Ken Pott, who is in his 20th year at 1 Morgan Stanley, where he is currently head of Morgan 2 Stanley's Capital Markets Execution Group, where he focuses 3 on equity offerings, particularly IPOs, of both international 4 and domestic issuers. 5 And, finally, we have Sam Ranzilla. Mr. Ranzilla 6 is the partner in charge of the Professional Practice Group 7 in the national office of the auditing firm of KPMG. Among 8 his many roles at KPMG was a stint in their Hong Kong office. 9 So I think you will appreciate that that is a 10 pretty impressive group of panelists, particularly their 11 international experience. 12 As I mentioned earlier, the focus of our panels 13 today is the reconciliation requirement for foreign private 14 issuers reporting under the U.S. securities laws and, in 15 particular, what are the anticipated effects of ending that 16 reconciliation requirement. 17 And, to that end, we are going to try to focus the 18 panels today, as we look at that issue through, I guess I 19 would say, the lens of three missions that we have here at 20 the SEC -- which is, promoting capital formation, maintaining 21 fair and orderly markets, and protecting investors. 22 And so we have asked each of the panelists on the 23 all three panels to formulate their comments thinking about 24 the following questions: 25 What are the factors that cause investors and 1 issuers to go to particular capital markets? 2 What are the effects on the availability of capital 3 in the U.S. markets if both IFRS, without reconciliation, and 4 U.S. GAAP are coequal financial reporting systems? 5 What are the opportunities and consequences for 6 various capital market participants of having this dual 7 system in place? 8 And finally, and quite importantly, what is the 9 impact on investors, and will they be receiving the necessary 10 information to make informed investment decisions? 11 So with that long wind-up, let's get started on our 12 first panel. 13 I would like to first call on Mr. Blackett and Mr. 14 Grabar for our first discussion topic, which is whether 15 ending reconciliation may result in U.S. investors having 16 additional opportunities to invest in foreign securities here 17 in our U.S. markets, presumably because the U.S. markets will 18 become more attractive to these issuers. 19 So, Mr. Blackett? 20 MR. BLACKETT: For my first point, I think I would 21 like to step back a little bit and try and put the investor 22 base in context, because it's not just the retail investor 23 base, which I think we traditionally view as being 24 potentially the, quote, "beneficiary" of such a change, but I 25 think it is also there is a large body of institutional 1 investors who would also benefit. 2 We look at our businesses with much the same view. 3 We break our investor base down into three broad categories: 4 Very large sophisticated institutional investors, 5 who generally have the scope and scale to invest 6 internationally by setting up offices abroad and investing in 7 local markets, investing in the back office systems, the FEX, 8 the custody, safekeeping, et cetera. Those are generally 9 institutions that probably have about $2 billion or more. 10 The other two categories -- and, of course, this 11 investor base is a spectrum, rather than a neat little series 12 of silos -- is what we call middle market. And we cover 13 about 5,000 of those institutions, and they run the gamut 14 from a few million to several billion dollars. 15 And then, of course, our retail investors that run 16 the gamut from the small accounts, with just an IRA, up to 17 Bill Gates, arguably. 18 So the spectrum of each silo can be quite broad, 19 but I think it's important to look at those three silos. 20 All of these, I think, have seized on the same 21 themes or trends over the last several years -- the last 5 or 22 10 years -- of diversification of portfolio assets, 23 increasing global awareness, the search for relative 24 out-performance, risk mitigation by buying non-correlative 25 assets -- and perhaps that has been tested in the last 1 week -- and thematic investment, looking for ethanol or 2 alternative investments around the world -- IT investments, 3 technology and natural resources, entry level housing. 4 So the themes that have driven those investors are 5 probably very similar across the various silos. The large 6 institutions, as I said, can do this locally. They have the 7 costs of scale, the local offices, the back offices, the 8 custody, et cetera. And, to some degree, that acts as a 9 barrier to entry for other institutional investors, in 10 particular, let alone retail, to get into that line of 11 business and benefit from those themes. 12 The smaller institutions and retail investors, from 13 where we sit, see the same opportunity, have the same general 14 awareness of the themes I outlined, but, for various reasons, 15 are substantially frustrated, either because of the lack of 16 availability of stocks in the United States or, indeed, their 17 ability to replicate it. 18 They are very focused -- particularly the small 19 institutions -- on us fees, fees on fees, fixed cost charges, 20 expenses that they may or may have to pass through. 21 So there is a huge body of investors that sees the 22 same opportunity, but are substantially frustrated, not just 23 by the lack of listing, if you will, but, more importantly, 24 the incremental cost of doing it themselves in a foreign 25 market. You're buying FEX, you're buying it at the retail 1 rate, rather than the wholesale rate -- those sorts of 2 expenses. 3 They do see the same themes and, from where we sit, 4 would be significant participants in offerings in the United 5 States -- but not just offerings here, but also the secondary 6 market and the liquidity that a ADR would provide them. 7 So, certainly, there is a large constituency out 8 there that I think would benefit both from the primary 9 market, but also the secondary market. 10 MR. GRABAR: I would just add, from the perspective 11 of the participants in the offering process that 12 reconciliation and the 2009 deadline are something that we 13 hear from our clients everybody is looking to, very eagerly. 14 Foreign issuers who are already in the U.S. market 15 have now dealt with 404 reporting. They understand that 16 foreign private issuer deregistration is on the way. And the 17 other thing they want to know before they decide whether to 18 stay is what is happening with reconciliation in 2009. So 19 people are very focused on this deadline. 20 For those who are already in the U.S. market, the 21 elimination of reconciliation will make a number of specific 22 kinds of transactions available to U.S. investors that are 23 not available today. And that is because the reconciliation 24 creates an anomaly in the reporting process for big foreign 25 private issuers. 1 Big issuers who comply in full with their '34 Act 2 reporting requirements find themselves blacked out from 3 making registered offerings under the '33 Act by the absence 4 of a recent U.S. GAAP reconciliation. 5 So our big foreign private issuer clients who took 6 advantage of securities offering reform to set up automatic 7 shelf registration statements, for example, find that, 8 because they don't prepare reconciliations of interim 9 financial statements, the only period during which they can 10 actually their beautiful new automatic shelf is between the 11 time they file their 20-F on, say, June 15th, and the time 12 that they would be required to prepare an interim 13 reconciliation, which is September 30th. That, of course, 14 includes the summer. 15 So that many of our foreign issuers actually, when 16 they, for example, are raising fixed income in the U.S. or 17 conducting a rights offering will avoid the U.S. public 18 markets and do private placement through registration rights 19 because of the blackout effect that falls from the 20 reconciliation. 21 So this is a small point, perhaps, in the big 22 picture, but it is a technical anomaly that means that 23 eliminating the reconciliation will make deals available to 24 U.S. investors that are not available to them today. 25 MR. WHITE: Ms. Kinney, do you want to give us the 1 stock exchange's perspective -- or your own? 2 MS. KINNEY: Well, I think the assumption that 3 there would be a larger pipeline of listings or issuers 4 coming to the U.S. markets is a fairly reasonable and sound 5 assumption to make. 6 We, as well, hear issuers, very excited, about the 7 progressive nature of the recent announcements by the SEC -- 8 the changes in 404, the deregistration, and then the 9 impending 2009 adoption. 10 So I think non-U.S. issuers are very encouraged by 11 what they hear and are really hoping to be able to stay in 12 the U.S., and many of them are hoping to come to the U.S. And 13 we see an enormous pipeline coming from Asia, as well as from 14 other developing markets around the world. 15 So, first, we encourage as much work as can be done 16 and, certainly, mutual recognition as quickly as possible. 17 And if it could be accelerated or any pilots could be 18 conducted, I think that would be useful. 19 We do think that more issuers will come to the U.S. 20 We think they will come in the form of dual listings. That 21 will mean that, because the markets outside the U.S. growing 22 and developing, the home country listings, as well as 23 international listings, will be the way that companies access 24 investors, broadly speaking. 25 And I think this would be very good for U.S. 1 investors because, today, many of those investors are going 2 to the home country to buy those securities, anyway. They 3 are being brought there by their broker-dealers. And, in 4 some cases, they are already relying on the disclosures and 5 the financial reporting in those home countries. So I think 6 investors are looking at the companies and wanting to invest 7 wherever those companies reside. 8 And I would say, finally, you can see that fact in 9 that, today, 20 percent of all investable assets are being 10 invested in non-U.S. companies. And so, to the point that 11 was made earlier, investors are seeking opportunities, and 12 they will go outside the U.S., if they have to, but they 13 would prefer to be here. 14 MR. WHITE: And you see this happening as soon as 15 the reconciliation requirement ends? 16 MS. KINNEY: I think that companies are getting -- 17 the answer is yes. I think that we see companies getting 18 ready and thinking about that and how to position in time 19 things into the U.S. But, you know, as I said, the faster 20 and sooner it could come, I think that would be great. 21 MR. WHITE: Mr. Grabar, just going back to your 22 comment, as soon as the reconciliation requirement ends, the 23 problem you described disappears? 24 MR. GRABAR: Yes, I think that's right. I would 25 also add that there are ways and ways of eliminating the 1 reconciliation requirement. And part of the effect that 2 Cathy Kinney is referring to could turn on which issuers can 3 take advantage of a system in which IFRS financial statements 4 are accepted without reconciliation. 5 And, obviously, the discussion focuses very much on 6 European issuers, but the same questions will arise -- and an 7 interesting variable in how this is implemented will be 8 whether issuers from non-European countries, or even 9 countries that have not adopted IFRS as their standards, will 10 be able to take advantage of this new regime. 11 Can a Brazilian or Thai issuer that chooses to 12 report in IFRS take advantage of the elimination of 13 reconciliation? The answer to that will drive much of the 14 business that Cathy is referring to, of new listings and new 15 registrations in the U.S. 16 MR. WHITE: Mr. Pott, from your perspective? 17 MR. POTT: Well, I agree with everything that has 18 been said. I completely agree with Cathy that the 19 elimination of reconciliation to U.S. GAAP will bring more 20 issuers to the U.S. and will be a good thing for U.S. 21 investors, since they are already going outside the U.S. to 22 invest. 23 And not to butter up my host, by having SEC 24 oversight on those issuers who are currently only listing now 25 outside of the U.S. would be a good thing, and the small cost 1 of eliminating U.S. GAAP reconciliation, I think is, to me, a 2 terrific step that -- you know, I think 2009 couldn't come 3 too soon. 4 I will say -- and it may be in the context of some 5 of these other questions you have here, John, but I will say 6 that I'm not saying that U.S. GAAP reconciliation is useless 7 right now. In fact, we are dealing with a number of issues 8 currently and over the past year where we are recommending to 9 our clients to have more details than less in their U.S. GAAP 10 reconciliation for some of their financings. But I'll talk 11 more about that in a little bit. 12 MR. WHITE: Professor Karmel, I know you are 13 particularly focused on retail investors -- 14 PROFESSOR KARMEL: Yes. 15 MR. WHITE: -- and opportunities for them. So I'll 16 let you go. 17 PROFESSOR KARMEL: Let me say that I think that the 18 elimination of reconciliation could prove a particular boon 19 for the retail investor, particularly the more sophisticated 20 retail individual investor, who now has certain difficulties 21 and has to experience certain costs in buying foreign 22 securities which are not listed on one of our exchanges or in 23 the SEC system. 24 And I know that the SEC is particularly worried 25 about protecting the retail investor, but it seems to me 1 that, today, the retail investor is less protected because, 2 as another one of the panelists said, coaxing foreign issuers 3 into the SEC reporting system really gives the individual 4 investor more protection in purchasing securities of such an 5 issuer than that retail investor is now having to go to 6 foreign market to do so. 7 MR. WHITE: We'll move to another topic -- unless 8 you have a question. 9 MR. HEWITT: This is a question for Mr. Blackett 10 and also Professor Karmel, because you mentioned you have 11 three groups of investors, basically, and the latter group 12 being the retail group and the small institutional investors. 13 And I wonder, since they are used to seeing U.S. 14 GAAP today, will they need any additional education or 15 information on IFRS to understand the implications of what 16 difference there is between U.S. GAAP and IFRS statements? 17 MR. BLACKETT: That's an interesting question 18 because, right now, I think most investors in foreign 19 securities list in the United States their interim results, 20 which are, in many cases, as important to them as the final 21 reconciliation with GAAP because it gives them an interim 22 check on how the business performing four times a year, if 23 you will, as opposed to the reconciliation, which generally 24 comes once a year. 25 They have increasing become understanding, I think, 1 of IFRS, or whatever the local generally accepted accounting 2 principles might be, some variation thereof -- which brings 3 up the interesting question about reconciliation within IFRS. 4 But I think they are generally used to seeing that 5 information presented in the local accounting term because 6 that's what they see -- not just on the three interim 7 periods, but also in the year-end results that come out in 8 late January or early February. And there is usually a long 9 period of time -- Nick talked about June 15. Maybe it's not 10 exactly that long, but it's pretty close to that before they 11 finally see the reconciled GAAP statements. 12 And, by then, the world, to some degree, has moved 13 on. The market is focusing on the June 30th results coming 14 up and, indeed, beginning to transition, frankly, into the 15 following year -- momentum into the following year. For 16 example, this year, by the time a filer files on June 15th of 17 the '07, investors are generally beginning to transition to 18 what the results for '08 look like. So it's almost a 19 historical anomaly. 20 They are reasonably sophisticated. Generally, for 21 foreign markets, a primary metric evaluation initially to 22 screen investments or some variation of firm value to EBITDA, 23 which doesn't necessarily drive you down into some of the 24 changes. I think they are appreciative in certain sectors 25 -- perhaps the natural resource area, home building, where 1 there is revenue recognition -- of a discussion about the 2 major differences, but I think, generally, they are 3 reasonably educated today about the local market and are 4 reliant on that flow today to have make an investment 5 decision. 6 PROFESSOR KARMEL: As an educator myself, I have to 7 say education is always worthwhile. And, of course, it, I 8 think, will be useful for the SEC and others, once 9 reconciliation is no longer required, to point out some of 10 the differences that still exist between U.S. GAAP and IFRS. 11 I think this will be important, not only for U.S. 12 investors and, particularly, retail investors, but something 13 that relates to a later question we are going to discuss, and 14 that is a decision that U.S. issuers will now have as to 15 whether they should report in IFRS, as opposed to U.S. GAAP. 16 So I think a concern of education will certainly be 17 in order, and I am fully confident that the SEC staff will do 18 its job here. 19 MR. WHITE: I am always fully confident that the 20 the SEC staff will do its job, of course. 21 Why don't we move to our second topic, which I 22 guess I will call more kind of the process or mechanics 23 topic. 24 But in a world when we are no longer reconciling, 25 how is it going to change, or is it going to change the way 1 that the securities of foreign private issuers are marketed? 2 Is the process going to be different? Is it going to look 3 different? 4 Mr. Pott, I know you were starting to go in the 5 direction before. Do you want to start us on how the world 6 will look different then, in terms of the process. 7 MR. POTT: Let me start by -- I want to follow up a 8 little bit on what Richard was saying because I do agree with 9 him that there is a broadening acceptance of IFRS. 10 I do think, though, that getting into the process 11 here and what we do -- which is, as investment bankers in 12 capital markets, we deal with issuers early in the process 13 who are trying to raise capital and who are trying to make 14 decisions about what the most efficient mechanism to raise 15 capital is going to be at the lowest cost of capital. And 16 involved in that is the decision on where to list and perhaps 17 even, in some cases, when we are dealing with foreign 18 issuers, what accounting principles to use. 19 And I would say that, in some of the industries 20 that I deal with, there is still a strong preference for U.S. 21 GAAP. And what we are trying to do is appeal to a number of 22 different constituencies. And among those are the research 23 analyst community and the investor portfolio analyst 24 community. 25 And when we talk to them, whether it be, you know, 1 potentially -- mostly out of the conservatism, there is still 2 a view that those constituents would like to do see numbers 3 in U.S. GAAP. 4 So what we have done in some of these industries, 5 some of these cases -- whether it be comparing to local GAAP 6 or IFRS -- we have strongly urged the issuer to forward in 7 U.S. GAAP financials and, if they cannot do that, then to 8 provide this reconciliation and to do in a way that is as 9 detailed as possible. 10 And I would say that that is -- given the 11 convergence of the two sets of principles, I would say that 12 that is the mostly out of -- I think the process is 13 inherently conservative. 14 And when you are dealing with a issuer who might 15 have some extra time, although they want to come to market 16 fast, if it only takes another month to reconcile to U.S. 17 GAAP or to provide -- in one case that we are dealing with, 18 they had to provide a more detailed reconciliation of 19 financial statements, which actually are shown in U.S. GAAP 20 -- then often we end up pursuing that route when, in fact, 21 the investors would probably be able to handle the IFRS 22 financials without the reconciliation, especially given that 23 there are many other comparable companies out there who will 24 be reporting in IFRS. 25 But I want to raise a little bit a note of caution 1 as to where we are right now, which is we are not completely 2 -- I'm not going to sit here and say that U.S. GAAP 3 reconciliation is not useful, because our clients are 4 reporting very detailed U.S. GAAP reconciliation, and it has 5 been effective in some recent instances. 6 MR. WHITE: That's interesting. I'm jumping ahead 7 a little bit on our topics here, but why don't we do it, 8 since you have teed it up. 9 So if we are in a world of no reconciliation, are 10 there others here who believe that we will still have to -- 11 that companies will need to provide that information in some 12 form? 13 MR. POTT: Well, John, let me -- 14 MR. WHITE: Or did I interpret what you said 15 correctly? 16 MR. POTT: No, no, no. What I'm telling you is 17 where things have been over the past year. But I do think, 18 by the time we eliminate reconciliation as an SEC policy, 19 that we will not be advising issuers to reconcile to U.S. 20 GAAP. 21 But there is -- I'm reinforcing the notion that 22 there is an educational process and a kind of baby steps 23 process to get the participants in the capital raising 24 process used to only dealing with IFRS. 25 Because, in a lot of ways, you have legacy issuers 1 that have -- let's take an industry, such as the airline 2 industry, where most of the key participants in that industry 3 report in U.S. GAAP, and the ones who are not U.S. have 4 detailed reconciliations. So you are dealing with people who 5 build their models in U.S. GAAP and are used to reading U.S. 6 GAAP financial statements. 7 So I think there is a process of educating 8 everybody who is involved in the capital raising exercise to 9 get them used to understanding what the differences are 10 between IFRS and U.S. GAAP and not seeing a reconciliation 11 every time somebody reports. 12 MR. WHITE: I'm seeing a lot of nodding heads up 13 here. Is everyone agreeing with Mr. Pott? Mr. Bukspan? 14 MR. BUKSPAN: Just to pick up on this point and 15 reflecting on change, people -- sometimes, it takes time for 16 them to get used to change. I'm still reflecting on the 17 change from Lotus 1-2-3 to Excel. For those of you that 18 remember that, you still had the slash in Excel. It took a 19 little bit, and then it was gone. So, clearly, there is an 20 element of education. 21 I think the point that you made about industries 22 that had predominant participants that are reporting using 23 one method versus the other -- it's important to note. 24 The question is: Who is responsible for the 25 education? Is it the responsibility of the Securities and 1 Exchange Commission, or the responsibility is the market's 2 responsibility? 3 As Commissioner Cox said earlier, it's a roadmap. 4 Ultimately, we're going to be converged. At the current 5 state, we have differences. And there is clear differences. 6 And differences are still arising whether you are reporting 7 only under IFRS and having certain options with IFRS, and 8 even under U.S. GAAP. For a variety of reasons, including 9 facilitating the transition, there are numerous options. 10 The issue of education does exist. And I think the 11 importance is that the education will come through, one, 12 robust disclosures -- because, at the end of the day, people 13 think about accounting and whether the reconciliation is 14 going away. In my mind, in my experience, many times, it's 15 an information game, rather than a number game -- how you 16 provide information. And in the spirit of the information 17 game, it is critical to think about what is the role of 18 disclosures in the spirit of educating the market. 19 And I am also pretty confident that whether it's 20 going to be CEOs or CFOs, or it's going to be market 21 participants, such as ourselves, or equity analysts, or 22 equity investors, they will point out the differences. 23 To the extent to the differences do exist and 24 you've got two nearly identical airlines and gross profit 25 margins are substantially different because there is 1 reporting differences, I guarantee you that you don't need an 2 education system or education structure. Somebody will take 3 care of our education. And they are generally going to be 4 enterprise that will be looking sub par -- notwithstanding 5 the fact that it's not really sub par, but it happened to be 6 sub par because of the reporting. 7 Just going back to the question that we are 8 actually covering now, which is the offerings -- I think one 9 thing to remember is that the spirit of reconciling creates 10 dual systems. You need to report under dual systems. 11 Reporting under dual systems requires dual 12 expertise. You have to have accountants that are experts in 13 U.S. GAAP and IFRS. We know how difficult it is to find 14 accountants who are experts in one versus the other. So 15 creating replicating systems -- and then the auditors will 16 have to be educated on auditing both. 17 I think it will take certain costs out of the 18 system. I haven't measured them, but I have a sense that 19 this could be quite significant over time. So broadly, if 20 you think about the global financial market, I don't know if 21 it is going to translate to more U.S. offering versus EU or 22 other markets offering, but I think, broadly, from a system 23 perspective, having one system will yank a lot cost out of 24 the system. 25 MR. WHITE: Can I ask one of the accountants to 1 comment on that? Mr. Kaplan? 2 MR. KAPLAN: Well, I certainly agree with that. I 3 do think it will take costs out of the system. We do hear 4 from our foreign private issuer clients that they have to 5 maintain the systems in order to prepare the U.S. GAAP 6 information. They need to educate people to be able to do 7 that, as well. We, obviously, need to educate our auditors 8 around the globe in order to make sure they understand both 9 U.S. GAAP and IFRS. So it certainly will take costs out of 10 the system. 11 We do also see, though, that there are other 12 concerns that foreign private issuers have in coming to the 13 U.S. markets. Many of those concerns have been enumerated by 14 some of the committees that have issued the publications 15 fairly recently around the litigation environment and other 16 concerns, as well. 17 But as it relates specifically to the 18 reconciliation, we do see that costs will be coming out of 19 the system. 20 We also see that education, which has been 21 mentioned here, is increasing. IFRS is becoming -- maybe the 22 best way to say it is more stable. And its stability is 23 growing. It clearly has increased the transparency of the 24 information. 25 And then, as it sort of relates specifically to the 1 question as to whether foreign private issuers -- you know, 2 how those securities are marketed to U.S. investors -- we do 3 see that, at least the way we understand it, the investment 4 community builds their models based upon the base GAAP -- so 5 it's either on IFRS or on U.S. GAAP -- so that they are able 6 to do their analysis in ways that don't always require those 7 reconciled numbers between the two in every instance. 8 And, in fact, our foreign private issuer clients 9 tell us that they generally get very few questions on the 10 reconciliation itself. Now, that may be because it comes out 11 very late in many cases; certainly, after press releases and 12 maybe some initial financial statements have been released. 13 So there is, at least, some anecdotal information that there 14 is not a lot of questions today on some of those 15 reconciliation matters. 16 MR. WHITE: Mr. Blackett? 17 MR. BLACKETT: I concur with that. The most 18 critical result for a newly issued company are that first, 19 second, and third quarter results and the correct 20 presentation of that. Now, the IPO, if you will, has relied, 21 to some degree, on that U.S. GAAP reconciliation. Again, to 22 your point, it has been a parallel process because people 23 have been building their models generally on local 24 accounting, so that when that first or second quarter results 25 come out, they are understandable and viewable within a 1 framework that is consistent with what you saw at the time of 2 the IPO and then what you saw in that first, second, or third 3 quarter. 4 Once you get through that first or second quarter 5 as a public company, you now know what investors' 6 expectations are, what they are interested in, et cetera, et 7 cetera. And if this is poorly relayed because you have 8 confused them with accounting issues, the stock will be, 9 arbitrarily perhaps, punished in the short run, and all of 10 the constituents in the process -- the underwriters, 11 underwriters' counsel, management, financial management of 12 the company and, arguably, the auditors -- will be punished 13 to some degree reputationally, or, certainly, verbally by 14 their investors. 15 So there is a huge incentive in the IPO process to 16 educate people about what the process will be going forward, 17 and not just over-reliance on the annual GAAP reconciliation, 18 which, as Nick said, is a very delayed process and almost 19 overcome by events. 20 MR. WHITE: Mr. Grabar? 21 MR. GRABAR: I was just going you have to remember 22 what reconciliation is good for and what it isn't good for. 23 It isn't good for giving investors what they want 24 going forward -- which is comparability issuer to issuer and 25 comparability period to period. The reconciliation doesn't 1 do that. 2 What the reconciliation does is it identifies 3 differences in accounting principles and measures them. And 4 it has been very valuable for that purpose. But I submit 5 that that purpose is falling away because of convergence. So 6 I am more optimistic than Ken is that, when reconciliation 7 goes, it won't be missed. 8 MR. WHITE: Mr. Ranzilla? 9 MR. RANZILLA: Let me follow on on a couple of 10 themes here. To first address the issue of the cost, one of 11 the issues that will need to be addressed -- not by, 12 necessarily, the Commission directly, but, rather, by the 13 PCAOB -- is the current requirement in the quality control 14 standards, which are referred to in their overall standards. 15 They are in our standards and it's, you know, code name 16 Appendix K, if you will. 17 And it requires a review of filings that are made 18 here in the U.S. by foreign private issuers by individuals 19 knowledgeable in U.S. GAAP, U.S. auditing, and U.S. 20 independence standards, who will be able to understand the 21 differences between the home country requirements and those 22 here in the U.S. 23 One has to sit back -- "one" being the SEC and the 24 PCAOB -- and decide whether or not that requirement makes any 25 more sense -- to require, in essence, an involvement of a 1 filing reviewer -- the term used in Appendix K -- in those 2 situations where there is no U.S. GAAP reconciliation. 3 Now, that goes directly to the cost and taking cost 4 out of the system, because most of the filing review process 5 that is undertaken today is generally done by U.S. teams -- 6 U.S. partners, senior managers -- very skilled, very seasoned 7 people. There is there virtually no leverage in that 8 situation. And there are costs associated with that. But, in 9 order for the foreign member firm to be able to state 10 compliance with PCAOB standards, that review needs to be 11 undertaken. 12 So that's one factor to consider as we look forward 13 to the auditor's involvement in a world with no 14 reconciliation. 15 MR. WHITE: So you're saying when the 16 reconciliation requirement leaves, you'll have that cost, 17 unless -- 18 MR. RANZILLA: It's currently sitting in the 19 interim standards of the PCAOB. One surely has to sit back 20 and say, well, one of those elements has gone away, right -- 21 the U.S. GAAP to home country GAAP or IFRS reconciliation. 22 But there are still audit standard differences, home country, 23 and independent standards. 24 Which maybe brings me to my second point, which is 25 that -- maybe to make an advertisement for the need to 1 converge auditing standards and independence standards. 2 Obviously, that is further behind than where we are with the 3 convergence of U.S. GAAP and IFRS, but there is, I think, a 4 need to converge auditing standards in a world where we truly 5 are Cross-border and trying to be transparent in that manner. 6 So that is a second issue, I think, of a longer-term nature 7 for us to deal with. 8 MR. WHITE: Ms. Kinney? 9 MS. KINNEY: I was just going to comment on the 10 point that Nick made about reconciliation won't be missed. 11 And just to use our own example, as you raised earlier, we 12 are going to be a U.S. company and are going to merge with 13 Euronext. But, as a consequence of that merger, we had to go 14 back and reconcile Euronext's financials to U.S. GAAP. And 15 because they were very acquisitive over the last several 16 years, that was an extremely expensive reconciliation. 17 And I think our CFO, and I'm sure John Thain would 18 say that the results would have been probably neither 19 perceived nor appreciated by the investors who were going to 20 look at the company's disclosed financials that were audited 21 and will be continued to be audited under U.S. GAAP going 22 forward. 23 So we went through a very expensive process, and 24 it's not clear that investors would really have appreciated 25 the very small differences that resulted from that 1 reconciliation. 2 MR. WHITE: Professor Karmel? 3 PROFESSOR KARMEL: I think others have made good 4 points with regard to periodic comparability of a particular 5 issue. And, yet, there is still the question of 6 comparability of various companies within the same industry 7 and an investor trying to decide, "Should I buy" -- to use 8 the example given before -- "X U.S. airline or X foreign 9 airline?" 10 And I would just add to what has already been said 11 that I think this really puts something of a burden on many 12 of the intermediaries represented at this table -- the 13 investment bankers, research analysts, the exchange, and the 14 rating agencies -- in that it is going to be important to 15 investors, particularly smaller institutional and individual 16 investors, to gain an understanding of what all of this means 17 in terms of comparability of different issuers in the same 18 industry. 19 MR. WHITE: I would actually like to have Mr. 20 Bukspan and Mr. Grabar comment on that point. What is your 21 reaction, from the rating agency standpoint, and what are 22 lawyers going to have to do here? 23 MR. BUKSPAN: First, I welcome the challenge. I 24 think this is when we have seen our role all along as 25 analysts. The difference between the analyst and the 1 accountant is the accountants will have to peg something to a 2 number. Analysts, by definition, will take the numbers, pick 3 them apart, slice and dice them, stress them, project them. 4 So there is a clear difference between the accounting method 5 and what we are doing with the numbers. 6 I will reemphasize and reiterate the significance 7 of disclosure, including disclosure will allow us to provide 8 -- or use past information for forward-looking data that we 9 need in order to project, ultimately, a company's ability to 10 pay its obligations when they become due. 11 On the point of whether the reconciliation will be 12 missed or not and the cost associated with this, just a point 13 of caution. In preparing for today, I pulled two financial 14 statements, and there are pronounced differences -- huge 15 differences. 16 So the first reaction would be for someone to step 17 back and say, "You know, we still need a reconciliation," 18 because if the company was an acquisitive company, or the 19 company was not an acquisitive company and the business 20 combination rules were introduced in the EU three years later 21 or two years later, we can have meaningful differences in 22 equity. 23 So you are looking at a financial institution that 24 has a U.S. GAAP equity of X and an IFRS GAAP of 2X. So 25 someone can feel a little bit uncomfortable. And I think 1 this is exactly where the role of an intermediary is. 2 And this is where, you know, disclosure comes into 3 play, risk assessment comes into play. There is other 4 influences that we are seeing. And I think it's maybe a 5 little semantic here, but IFRS stands for International 6 Financial Reporting Standards and U.S. GAAP stands for 7 Generally Accepted Accounting Principles. I think there is 8 some sentiment here that we need pick up on. It's the 9 importance and the difference and importance between 10 accounting and financial reporting. 11 There is trends about -- for example, European 12 insurers are reporting under a framework called EEV -- 13 European Embedded Value. There is a trend now about Solvency 14 II, about Risk Measures, Basel II, and other risk disclosures 15 that are provided by the Commission, for example, we are 16 focusing on very closely. 17 So it is not necessarily the number. It is what is 18 behind this number. It is not necessarily whether it's an 19 acquisition. And this is our role. This is what we do day 20 in and day out. 21 The reason what we somehow will miss the 22 reconciliation, but we are willing to be live without it, is 23 that we are information freaks. And, you know, the more out 24 there, we have another data point we can analyze and 25 benchmark and look at. So we are clearly going to miss the 1 reconciliation, but we clearly can live without it, given 2 more information and supplementary disclosures. So that's 3 where we come out on that. 4 MR. WHITE: Mr. Grabar, what happens from your 5 securities counsel perspective? 6 MR. GRABAR: Well, I was just going to say we are 7 living without the reconciliation today because, if I think 8 back over my calendar the last six months, I have worked on 3 9 or 4 registered offerings, but I have worked on 6 to 10 10 144(a) offerings that we conducted full due diligence without 11 the benefit of a reconciliation. 12 So what do we do with the differences in accounting 13 principles when we don't have the reconciliation? That's a 14 tough question. And part of the answer does turn on the 15 practices of the accounting firms and on having a robust due 16 diligence process that includes people who understand 17 accounting. 18 Getting rid of the reconciliation will take the 19 educational burden off of a particular issuer and a 20 particular accountant and put it on the people that Mr. 21 Bukspan is talking about -- on the rating agencies, on 22 research analysts and, I think, on public sources. 23 One of the things we look at, if you -- say, you 24 have an airline; you're doing a 144(a) offering for an 25 airline. One of the things that you would look at to see if 1 there are GAAP issues, GAAP principles that you to need to 2 think about is CESR's study on technical equivalence, because 3 CESR went to the effort of inventorying large numbers of GAAP 4 differences and thinking through what they might need. 5 That kind of exercise is something that people will 6 have to do without a reconciliation. They will have to find 7 sources for intelligent discussions of important GAAP 8 differences, other than the issuers. And we are already 9 there. 10 MR. WHITE: Mr. Kaplan? 11 MR. KAPLAN: Maybe this runs a little bit to what 12 Sam said and also to what Nick said. I do agree that one of 13 the next steps that the PCAOB will need to think about is 14 what to do with what Sam referred to as being Appendix K -- 15 that is, the requirement that there is a designated review by 16 a knowledgeable person in U.S. auditing standards and 17 independence and whether or not that review -- which was 18 initially put in premised more on the accounting than 19 anything else -- continues to be necessary. 20 However, I do also think that, likely, what would 21 happen, even if that requirement were removed -- and a little 22 bit to what Nick said -- is that most of the firms have their 23 own internal quality review processes that take place and, in 24 many cases, those are focused on -- you were talking about 25 Cross-border financing -- on the inbound territory's 1 regulatory procedures. 2 So even though the specific requirements that would 3 be eliminated might be around the U.S. accounting aspects, if 4 you were to eliminate the designated review, from a 5 regulatory perspective as it relates to accounting and other 6 disclosures that might be required for that jurisdiction, 7 likely, there would still be market forces that would require 8 some of these reviews and, therefore, may embed some of the 9 quality that we are talking about for the regulatory 10 requirements for whether it be the U.S., or London, or 11 whatever the territory might be. 12 MR. WHITE: Ms. Kinney? 13 MS. KINNEY: I think, just to put some statistics 14 around Nick's point about 144(a), if you look at the year 15 2000, there were 149 deals -- global IPOs -- with 144(a) 16 tranche that year, and they raised $58 billion. In 2006, 17 there are 204 deals done with a 144(a) component, raising 18 $138 billion. 19 Now, if you contrast that to the non-U.S. companies 20 that were SEC-registered in 2000, you had 100 deals raising 21 55 billion. And in the year of 2006, you had only 40 deals 22 that raised $11 billion. 23 So to his point, reconciliation really doesn't 24 exist today. 25 MR. HEWITT: I have a question for the accountants 1 concerning the PCAOB and the requirement now on the 2 reconciliation process of a U.S. review partner. 3 If the reconciliation goes away, is there a 4 necessity at all for a U.S. partner to be reviewing 5 information? I don't want to put you on the spot, but -- 6 MR. WHITE: Mr. Kaplan? 7 MR. KAPLAN: Well, as it relates to the IFRS-based 8 set of financial statements, I mean, clearly, the auditors 9 that would be looking at that around the globe -- whose now 10 base accounting language is IFRS, in a sense -- would be as 11 knowledgeable in that as anyone might be in the U.S. 12 So to look at it from purely a U.S. accounting 13 perspective, once you eliminate the reconciliation from a 14 U.S. GAAP perspective, the answer is, likely, no. 15 However, as I mentioned, there are a number of 16 regulatory requirements in the U.S. to file with the 17 Securities and Exchange Commission that go beyond just the 18 U.S. accounting, and those also may relate to the filing from 19 an IFRS perspective. 20 So to make sure that our clients meet the 21 regulatory requirements, likely, we would still want to have 22 someone from a quality perspective that would take a look at 23 the filing, make sure that it meets that. There are also 24 often thing like comfort letter requirements and other 25 requirements, as well, that we would need to look at from a 1 U.S. PCAOB perspective. 2 MR. RANZILLA: Let me take a shot at that. I agree 3 with Dave. The question will be: Do you require that 4 through the quality control or auditing standards of the 5 PCAOB, or is that just an element of -- an international 6 network of firms would designate a quality control element on 7 its own and compete in the marketplace with some difference 8 in that regard. 9 But Dave is absolutely right. If you eliminate the 10 measurement and recognition issues through the 11 reconciliation, there still are SEC requirements, and there 12 is still an auditing issue. 13 But if you look at risk from the perspective of the 14 investor, the risk of missing a reconciling item between home 15 country GAAP and U.S. GAAP, I think is far more significant 16 than the risk of the auditing standard not being complied 17 with. 18 Because, again, focusing on just the largest of 19 firms, there is a global methodology. I mean, it's a base 20 methodology that the firms employ around the world. It's 21 tweaked to meet individual jurisdictions' requirements. But 22 the risk of an audit not being conducted in accordance with 23 PCAOB standards, in my mind, is a much lower risk than a risk 24 that a reconciliation might miss a material item without the 25 involvement of somebody who is schooled and expertised in 1 U.S. GAAP. 2 MR. HEWITT: Thank you. Mr. Kaplan? 3 MR. KAPLAN: Actually, another way to think about 4 it, in answering that question is, even today, many of the 5 firms -- and one of them includes PricewaterhouseCoopers -- 6 actually have a requirement that requires a review of 7 144(a)s. So even there is no designated review requirement 8 there, we actually, under 144(a), would require a review of 9 those offerings. 10 MR. WHITE: Why do not we move to the next general 11 topic. I know we have danced around this one in a number of 12 ways already, but, at least, for those of us that come from 13 Corporation Finance, I guess what we focus is, of the three 14 SEC missions -- investor protection and disclosure to 15 investors is the one that, at least, I am the most focused 16 on. 17 And, in fact, I think each lawyer who has started 18 work here at the Commission, when we are sworn in by Chairman 19 Cox, he points out to us that the investor is our new client, 20 as opposed to whoever our clients were before. 21 So, with all of that as a lead-in, do we believe 22 that investors will be receiving the information they need to 23 make informed investment decisions when we have eliminated 24 the reconciliation requirement? 25 Let's start with Ms. Kinney. 1 MS. KINNEY: Well, I think the answer is yes. And 2 I think the point was made earlier that perhaps, even in the 3 lack of reconciliation, the timing of information can be 4 improved. 5 So the point was made earlier, if you have a 6 December 31 reporting company, in the February to April time 7 frame, you would have the numbers. And today, an investor 8 has to wait for the 20-F until late June or, at the latest, 9 the middle of July. And so I think that there would be a 10 presumption that the information coming forward would be more 11 timely and, therefore, investment decisions could be made 12 with perhaps better information. 13 MR. WHITE: Professor Karmel, do you think 14 investors are going to be taken care of here? 15 PROFESSOR KARMEL: I think investors will receive 16 enough information, but -- and I think it's a big but -- as I 17 said before, I think this puts a certain burden on the 18 intermediaries. 19 If, for example, a securities firm is recommending 20 to one of its clients that the client purchase a particular 21 foreign security where there is no reconciliation, then, in 22 order to have a reasonable basis for that recommendation -- 23 which is a simple requirement -- the firm is going to have to 24 understand what this means and is going to have to appreciate 25 the difference between the way in which reporting was 1 previously done where there was a GAAP reconciliation and 2 now. 3 Now, maybe that would be irrelevant in terms of a 4 particular security, but in terms of another security, it 5 might be something important. 6 MR. WHITE: I mean, the 144(a) offerings we have 7 been commenting on are obviously all sold to sophisticated 8 investors. 9 PROFESSOR KARMEL: That's right. But now -- 10 MR. WHITE: But we are now talking about sales to 11 retail investors. 12 PROFESSOR KARMEL: Well, now, we're talking about 13 sales to retail investors and smaller institutions that don't 14 qualify as credit investors for purposes of 144(a). 15 So I think that is going to be a different dynamic, 16 and I think investors will be expecting that the 17 intermediaries involved will have analyzed the securities. 18 And, as I said, this puts a burden on the exchanges 19 that list these securities, on the investment bankers, on the 20 research analysts, and on the rating agencies, when we are 21 talking about foreign bonds, particularly. 22 MR. WHITE: We'll keep going down to the left 23 there. Are investors going to be protected? Mr. Blackett? 24 MR. BLACKETT: I think, to Neri's point, there are 25 multiple sources -- or silos, if you will -- of information, 1 and GAAP reconciliation is just one. 2 We shouldn't lose sight of -- first, in no 3 particular order, SOX 404 is a continuing obligation for all 4 foreign issues. That is a real hammer in the minds of 5 foreign issuers. They take that extraordinarily seriously. 6 So there are a number of constant disclosure 7 requirements. The advent of websites. When they come to the 8 U.S. market, they clearly realize that they have to, in many 9 cases, step up their investor contact and their investor flow 10 of information. And when you look at a website for a foreign 11 issuer today versus two or three years ago, part of the 12 extraordinary change is not just technology, but also 13 recognition. Analysts, when they publish, are invariably 14 publishing exclusively, I would argue, in local GAAP for 15 comparative purposes. 16 And, also, let's not forget one thing. Local 17 regulators and markets are seeing the potential for liquidity 18 to go to the United States. Particularly, regulators are 19 looking at what we do to improve the attractiveness of our 20 market to try and reverse that trend, because none of them 21 want to see their market wither for lack of -- for a 22 perception that they are somehow delinquent. 23 Novo Mercardo, for example, in Brazil, is a clear 24 example where the regulator, in anticipation of seeing 25 liquidity move, realized they had to join that flow of 1 increased disclosure and awareness. 2 So I think there are multiple channels. And I do 3 think, at the end of the day, discussion of the differences, 4 where materially appropriate, between IFRS and GAAP are 5 important. 6 Now, as the two converge, so that goes away. But 7 until they converge, disclosure and discussion around it, at 8 least on the annual basis when they come out, is important 9 for investors. And that is usually on, as I said earlier, 10 revenue recognition and timing of revenue recognition, or 11 disclosure, in mining and natural resources, of probable and 12 possible reserves, and issues like that. 13 MR. WHITE: I want to keep going down here and 14 getting everyone on record on this question. Mr. Bukspan? 15 MR. BUKSPAN: Well, on that point, I'm just getting 16 myself on record. I'll try to condense a day in the life of 17 an analyst to two minutes. 18 But when analysts look at these issues, sometimes, 19 you can have the reconciliation that will allow you -- 20 sometimes, analysts can say there is a clear economic answer. 21 For example, some of our analysts truly believe that the 22 entire economic deficits of a pension plan needs to be on the 23 company's balance sheet. Sometimes, it's just an exercise in 24 comparability. 25 And, stated differently, maybe it will be pure to 1 measure everybody and put them all on a scale without their 2 shoes on. But let's say that 90 percent of population has 3 their shoes on. So what the analyst would do is approximate 4 what is going to be the weight of the shoe in order to get an 5 approximation and do a relative comparison. 6 So there are differences. There are clear 7 differences. And, frankly, it's not necessarily the 8 difference between IFRS and U.S. GAAP. There's clear 9 difference within U.S. GAAP alone. FASB just reduced the 10 fair value option, which creates differences with U.S. GAAP. 11 And differences existed always, even within U.S. 12 GAAP. Of course, you will remember pooling versus purchase; 13 FIFO versus LIFO. And if you start looking at companies, and 14 you compare those companies, you need to make an analytical 15 decision. 16 Sometimes you have the information or you can 17 reconstruct the information. So we try to capitalize leases, 18 put them on the balance sheet, look at pensions, and quantify 19 some things. So you sometimes you can quantify. 20 Sometimes our pencils are not as sharp because it's 21 impractical to do it, or you don't have the information. And 22 then you just know that, with any single number, you have 23 x-degrees of freedom. 24 And if there is a very large gap, I'm sure analysts 25 will be asking the questions, and companies will look at the 1 issues, and these gaps will be minimized over time, either 2 through convergence or through disclosures, to allow users to 3 understand those differences. 4 And I don't see it as any different than what we 5 are seeing today. I think people forget the optionality 6 within existing accounting. I think the analogy was made 7 earlier about a roadmap and how difficult it is to follow a 8 roadmap. I use my own analogy on the road. I think, 9 currently, we have a system where you can drive on the right, 10 you can drive on the left, you can drive on the center in 11 some points. And this is part of the convergence. 12 I think what is very important for us to understand 13 is to have road signs. If we have the appropriate road 14 signs, we know how to drive, using the system. If we don't 15 have the road signs, we are running the risk that we have 16 major clashes . 17 And this is the role of the auditors -- to make 18 sure that we have the appropriate transparency, consistent 19 auditing, whether it's the PCAOB or the regulator. But I 20 think this is ultimately the confidence of the users in the 21 financial report. 22 And, at the end of the day, I think the jury is 23 still out. If there is going to be a significant uncertainty 24 in the market with respect to the quality of learning, 25 whether it is under U.S. GAAP or under IFRS, there will be a 1 market discount for uncertainty because there is some -- and 2 if we reflect back on the Enron, I don't think it's an issue 3 of U.S. GAAP. I think it's an issue that the information 4 about the VIE wasn't prominently disclosed in the financial 5 statements in the first place. I would probably vouch that 6 Enron wouldn't have happened if they just needed to provide 7 certain disclosures under VIE. 8 I think the focus will be also on the disclosures, 9 and risk disclosure and information disclosure. I think we 10 will all benefit and the system entirely will benefit, given 11 that, as analysts, I think we don't like options. We like to 12 have to a single system. We recognize that are some 13 differences, but, with the roadmap, hopefully, at some point, 14 we will have a single starting point, and I think, hopefully, 15 sooner than later. 16 MR. WHITE: I take it from that that you agree 17 with, in effect, what Chairman Cox said earlier, in that we 18 don't need to get complete convergence because we can have 19 two coexisting systems that are different, as long as they 20 are understood. 21 MR. BUKSPAN: I fully agree with that. And I also 22 will take it to the next level and say, even if you have only 23 U.S. GAAP entirely, or only IFRS, within a single system, you 24 will have differences that you need to be equally aware; 25 that, in theory, there could be subsets of the standard that 1 are not harmonized because companies can elect one option 2 versus the other, which could create meaningful financial 3 statement differences in results. 4 MR. WHITE: Mr. Grabar, let me get you on record, 5 as well. 6 MR. GRABAR: Well, I'm not sure I know what 7 investors need. I just have a checking account, and I'll 8 leave it at that. But what p