SECURITIES REGULATION IN LOW-TIER LISTING VENUES: THE RISE OF THE ALTERNATIVE INVESTMENT MARKET

Fordham Journal of Corporate & Financial Law, 2008 by Mendoza, Jose Miguel

After the vibrant takeover wave of the 1980s, the U.S. economy entered a high-growth period in which market conditions were optimal for the economic expansion of the following decade. As high-tech startup firms started to dominate the marketplace, investors and gatekeepers alike were caught in a wave of irrational exuberance that would ultimately lead to a market collapse of vast dimensions.58 The bull market of the 1990s saw stock indices rise to unprecedented levels, peaking in 2000: the NASDAQ Composite Index reached 5,048, the Dow Jones Industrial Average rose to 11,722, and the S&P 500 peaked at 1,527. Despite the buoyant expansion of this decade, the problems that foreshadowed the passage of SOX soon became evident. As the 1990s economy slowed, the high overvaluation of tech-related stocks, largely fuelled by market euphoria, negatively affected investors in equity markets.59 Widespread gatekeeper failure accompanying notorious fraud scandals at some of the largest U.S. companies60 and public anxiety following terrorist attacks on New York played a large part in shifting public opinion against regulatory laxity.61 Federal intervention was swift.62 After Enron's stock plummeted amid accounting scandals and paper-shredding rumors, and Worldcom collapsed, the U.S. Congress raced to pass SOX.63

Federal intervention again broke from the historical trend that each state regulates the corporate affairs of its companies.64 The newly enacted SOX imposed stiff corporate governance requirements on publicly-held corporations, particularly with regard to the company's auditing processes.65 Scholars across the U.S. still argue whether the costs imposed by raising governance hurdles are justified.66 Specifically, the SOX debate turns on whether the Act reduced the cost of capital in the U.S. more than it increased the regulatory burden for publicly-held companies.67

While both sides offer compelling arguments for68 and against69 the Act, recent reports, which single out the 2002 law as one of the main reasons for the loss of competitiveness of the U.S. financial markets, tend to bolster the argument of SOX's opponents.70 The Report of the Committee on Capital Market Regulation, released on November 30, 2006, concluded that regulatory intensity set into place by SOX and similar legislative efforts eroded U.S. dominance and competitiveness.71 After carefully analyzing the current state of affairs in the U.S., the blueribbon Paulson Committee recommended amendments to securities regulation and litigation, as well as adjustments regarding the implementation of SOX section 404.72 The publication of the Paulson Report preceded a study conducted by the Commission on the Regulation of U.S. Capital Markets in the 21st Century. This report suggests a comprehensive overhaul of U.S. securities regulation, centered on the federal government's approach to financial markets, the SEC's powers regarding SOX, and the U.S. litigation framework.73 A third report sprung from a joint effort between New York City's Mayor Michael Bloomberg and Senator Charles E. Schumer.74 After identifying several factors that have eroded New York's leading position, including the migration of IPO activity and strong dynamics driving the growth of non-U.S. markets, the Bloomberg-Schumer report calls for urgent action "at the national, State and City levels to enhance the competitiveness of the U.S. financial markets and defend New York's role as a global financial center."75 Lending further credence to the three reports, a recent study displaced New York as the world's top financial services center, awarding London the highest ranking.76