TESTIMONY OF MARC E. LACKRITZ, PRESIDENT
SECURITIES INDUSTRY ASSOCIATION

“CHINA’S CAPITAL MARKETS”

BEFORE THE U.S.-CHINA COMMISSION
December 6, 2001

Commissioners Robinson and Wessels, and members of the United States-China Commission:

I am Marc E. Lackritz, President of the Securities Industry Association.¹ I am pleased to appear before the Commission today to testify about China’s capital markets and the opportunities for U.S. firms, our clients, and the U.S. economy to do business in China. My testimony will focus on our economic relationship with China, specifically with respect to: 1) cross-border capital markets activity; and 2) the goals and objectives of the U.S. securities industry in our growing relationship with China’s economy.

At the outset, I should note that the U.S.-China relationship is still in its infancy. The United States only “normalized” relations with China in 1978, and then in 1999 made them “permanent” when Congress passed legislation to eliminate the annual “Normal Trade Relations” review process. This process has now culminated in China’s accession to the World Trade Organization (“WTO”). During this period, the U.S.-China relationship has often been rocky and uncertain. While the U.S.-China relationship has matured, and is increasingly based on mutual economic and political interests, the U.S. securities industry still has substantial concerns related to China’s capital markets and the access provided to U.S. securities firms.

SIA has long supported more open, fair and transparent markets, and has strongly advocated liberalization in U.S. multilateral and bilateral trade discussions – including China’s WTO accession talks. The economic benefits of financial services sector liberalization reverberate throughout the world from widespread increased opportunities created by new entrants, innovative products and services, and capital markets with greater depth and efficiency. In the global economy, open and fair markets are essential to ensuring that markets operate efficiently so that investors can easily and quickly buy and sell shares across borders, while businesses can access capital at the lowest price. The international financial system has been a major and contributing factor in the marked increase in living standards of those countries that participate in it.

China’s WTO accession commitments for financial services, and more specifically for the securities industry, show a reluctance to open this sector fully to foreign competition. We believe China should improve and accelerate its financial sector reform so that it will have the financial tools necessary to sustain and improve the quality of its economic growth.

China’s Economy – Transformation and Opportunity
Since 1978, the Chinese government has increasingly realized that private companies would operate more efficiently than government-owned or -managed companies. As a result, the Chinese economy has become progressively more based on competition and open markets. China’s recent accession to the WTO will further enhance the development of a thriving private sector, now estimated to account for about one third of gross domestic product (over 50 percent if China’s agricultural output is included).

China’s tremendous progress over the past decades has, not surprisingly, also been accompanied by significant problems. China faces enormous internal challenges, including non-performing bank loans; the closing down and/or conversion of inefficient state-owned enterprises; and an agricultural sector of 330 million people (about 45 percent of China’s workforce) that faces lower prices and more competition. In spite of the tremendous challenges that China’s economy faces, it presents the U.S. with 1.3 billion potential consumers, myriad export opportunities for the U.S. goods and services sector, and an economy expected to double in size by 2006. By the end of the 1990s, China’s GDP increased by 10.7 percent per annum – a rate more than three times that of the United States during the same period. Foreign investment has played a key role in supporting China’s growth. Foreign-funded firms employ more than 18 million Chinese, and account for 16 percent of all industrial and commercial taxes. The U.S. investment in China to date has been modest, accounting for only eight percent of total foreign direct investment.²

Propelled by this economic growth, China is now our fourth largest trading partner, with imports and exports totaling a combined $116.2 billion in 2000. Moreover, since 1993, U.S. exports to China have nearly doubled to almost $16.2 billion annually, providing a market for U.S. exporters comparable to the size of France ($20.4 billion) and the Netherlands ($21.8 billion). Increased U.S. exports lead to more U.S. jobs at home. As China phases in its WTO commitments and continues its economic growth, U.S. firms will find their ability to export significantly enhanced, bolstering U.S. job creation and economic growth. The export opportunities in China – where ownership of new technology products such as fax machines, mobile phones, and personal computers stands well below its Asian neighbors – are enormous. China’s WTO accession is a certain catalyst for greater U.S. exports.

Expanding Business Opportunities for U.S. Financial Services Firms
Prior to WTO accession, many of SIA’s leading member-firms identified China as the largest single emerging market opportunity. Indeed, with China scheduled to begin implementation of its WTO commitments in the near future, U.S. securities firms will be able to broaden their role in China’s capital markets. Financing China’s infrastructure presents the U.S. financial services industry with an especially important opportunity. Analysts predict that China will invest more than $1 trillion in transportation and communications infrastructure improvements and energy-related capital equipment over the next decade.

Moreover, China’s nascent pension system must deal with a rapidly aging population. In 1995, the percent of China’s population over 65 was 6.1 percent; it is projected to reach almost 14 percent by 2025. World Bank estimates indicate that by 2030, the Chinese pension system will total $1.8 trillion. Already, several U.S. and other foreign firms have begun to capitalize on the enormous opportunities in China’s retirement market by signing technical assistance agreements with local fund management companies.

China’s capital markets have grown significantly over the past decade and helped finance the country’s domestic growth. China did not have a functioning stock market until 1991. By 2000, China’s equity market capitalization totaled $581 billion and was the largest emerging stock market in the world. Impressively, between 1995 and 2000, China’s stock market capitalization soared by nearly 70 percent per annum, increasing the value of Chinese stocks to 20 percent of all emerging markets. China also boasts 1,086 listed companies, exceeded only by Korea (1,308) and India (5,937).

China’s domestic capital markets will benefit from the entry of U.S. securities firms and their technology, capital, innovative products and services, and best practices. As local firms prepare for this increased competition, they will adopt new technologies and improve the quality of products and services they offer. More competitive and efficient capital markets will also improve the allocation of capital to borrowers and users, facilitate the hedging and diversifying of risk, and assist the exchange of goods and services. As China’s capital markets develop, Chinese firms will be better able to raise low-cost capital and support job creation.

Eighty percent of Chinese firms recently surveyed by the International Financial Corporation, however, consider access to financing a moderate or major constraint. Since financial markets are inextricably linked to increased investment and economic growth, strengthening China’s domestic capital markets will help to alleviate the significant financing constraints that Chinese firms currently face.³

China’s private and public sectors alone cannot mobilize the massive financial resources, advice and expertise that are necessary to sustain its economic growth. Much of the infrastructure development will, by necessity, be funded through foreign sources, and this opportunity has generated substantial interest by the U.S. securities industry. Indeed, despite difficulties entering and operating in China, numerous U.S. securities firms have established offices in China and have participated in China’s international securities offerings.

China has also reached out to the international capital markets to fund its growth. Private and state-owned Chinese companies raised nearly $75 billion in debt and equity issues in the international markets from 1991-2000. Of this total, a robust $48.3 billion in equity capital was raised, with nearly 88 percent raised in internationally targeted offerings. About seven percent was raised in targeted U.S. offerings and about five percent in Asia. The large disparity in international- versus U.S.-targeted equity issues may be a result of the more stringent, if not better, disclosure and accounting requirements for U.S. listings that Chinese issuers currently find difficult to meet. In 2000, Chinese issuers raised $20.1 billion in equity capital, 17 times the $1.16 billion they raised only nine years earlier.

Chinese issuers also made use of the international debt markets, raising $26.6 billion during 1991-2000. Of this total, about $10.2 billion was raised in international placements, while nearly $9.7 was raised through access to the U.S. markets. The remaining $6.7 billion was raised in Hong Kong and other Asian markets.

China’s remarkable economic reforms over the past 23 years have also begun to reverberate in the U.S. markets. Chinese companies have increasingly tapped the U.S. capital markets – the world’s largest, deepest and most liquid – as they seek to expand their businesses. Trading of Chinese issuer shares on the New York Stock Exchange soared more than six-fold in the past four years, from $872 million in 1996 to $5.6 billion in 2000. The 21 Chinese issues now listed on the NYSE represent the largest concentration of listings in the region, and the fifth largest in the world. Although the United States faces stiff competition for these listings – the introduction of the euro and the creation of a single European capital market are increasingly attractive to Chinese issuers – the U.S. markets are unrivaled in their depth, liquidity, and transparency, as well as their political and economic stability.

Chinese issuers, however, will have to improve their disclosure and corporate governance standards to meet the demands of the international investing community. Indeed, the China Securities Regulatory Commission has already promulgated regulations to raise the quality and level of disclosure. Stricter disclosure of financial information is now required for prospectuses, and companies must ensure they have independent directors. These rules will not only help China access foreign capital, but they will also set the foundation for building a more robust retail and institutional investor base in China.

China’s WTO Commitments For Securities Firms
China’s accession to the WTO gives U.S. firms some greater market access. The commitments from China for the securities industry represent a first step upon which to pursue additional liberalization of China’s capital markets. Although China’s accession terms still leave securities firms facing significant barriers to market access, they do contain several important commitments. For example, there are provisions for minority ownership in local securities underwriting, asset management firms, and advisory companies. Particularly noteworthy are China’s commitments for the securities sector that include the grandfathering of existing activities and investments, national treatment, and the elimination of China’s “economic needs test.”⁴

CHINA’S WTO COMMITMENTS TO FOREIGN SECURITIES FIRMS

• Participate directly in B share transactions*

• Eligible for special membership on Exchanges*

• Establish securities joint ventures (1/3 ownership) to underwrite A shares, and to underwrite and trade B and H shares and government and corporate debt

• Establish funds management joint venture (1/3 ownership*, 49 percent after three years.)

• Grandfather existing investments

• Elimination of economic means test

• National treatment

*upon accession

In addition to its WTO commitments, China is taking other steps to open its markets. These include allowing foreign firms to list and issue local currency (renminbi) shares, and the establishment of foreign investment venture capital firms. Notwithstanding these liberalizing steps, SIA strongly urges China to make the following additional commitments in the ongoing WTO financial services discussions:

Market Access – Permit foreign firms to set up a securities company in China, either through a wholly-owned entity or other business ownership structure, with power to engage in a full range of securities activities, including underwriting, secondary trading of government and corporate debt and A shares, etc. Firms should have the right to establish offices without geographical limitation.

Asset Management – Permit foreign firms to manage money for Chinese investors, both retail and institutional, as well as to sell internationally diversified mutual funds to individuals through qualified local distributors.
Foreign Ownership Limits – Lift foreign ownership restrictions and permit foreign investment in certain sectors and/or state-owned businesses, e.g., insurance, banking and asset management.

Although U.S. firms still lack the basic access needed to compete effectively, the lack of a strong legal foundation in China further complicates the ability of U.S. firms and their clients to participate. An unwelcome level of regulatory risk characterizes China’s business climate and acts as a severe tax on capital. A recent PriceWaterhouseCoopers’ report measured the adverse effect of opacity on the availability of capital in 35 countries.⁵ Not surprisingly, the report ranked China at the bottom with an opacity score equivalent to an additional 46 percent corporate income tax.⁶ China also placed last in legal and judicial opacity, as well as regulatory uncertainty and arbitrariness.

If China is to sustain long-term economic growth and continue to attract the foreign capital it needs, it must improve its legal infrastructure. Greater transparency will be a critical part of improving the rule of law in China. Transparent and fair regulatory systems play an integral role in the development of deep, liquid capital markets that, in turn, attract market participants, increase efficiency, and spur economic growth and job creation. A high level of transparency also ensures that foreign firms are accorded national treatment. Perhaps most importantly, transparency enhances investors’ trust and assists international capital flows. Lack of transparency in the implementation of laws and regulations can seriously impede the ability of securities firms to compete.

SIA has published a paper (Appendix I) that serves as a blueprint for establishing transparency. The paper underscores the key guiding principles of fair and transparent regulations as follows: 1) rules, regulations and licensing requirements should be considered and imposed, and regulatory actions should be taken, only for the purpose of achieving legitimate public policy objectives that are expressly identified; 2) regulation should be enforced in a fair and non-discriminatory manner; 3) regulations should be clear and understandable; 4) all regulations should be publicly available at all times; and 5) regulators should issue and make available to the public final regulatory actions and the basis for those actions, in order to enhance public understanding thereof.

We also note an American Chamber of Commerce in China White Paper⁷ that commented on the importance that “consistency” has on building the rule of law. Defining “consistency” as “…the fair, reliable, and nondiscriminatory application and enforcement of both laws and contracts,” the Chamber’s report noted, “Inconsistent enforcement of contracts and laws continues to limit further increases in foreign investment.” For example, local courts tend to rule in favor of local business in commercial disputes with foreign companies.⁸ Rules and regulations on bankruptcy and intellectual property rights, among others, must be clear, fairly applied and enforceable. The development of such rules and regulations will attract and improve access to financing.

Continued liberalization of China’s capital markets has clear benefits for China and the global economy. It is a long-established U.S. policy to promote economic growth through open financial services markets. Global economic integration facilitates the importation of capital and intermediate goods that may not be available in a country’s home market at comparable cost. Similarly, global markets improve the efficient allocation of resources. Countries gain better access to financing, and the suppliers of capital – institutional investors or individual savers – receive better returns on their investments.

Finally, open, fair markets help increase living standards. We look forward to working with this Commission, the Administration, and Congress to further expand the U.S. securities industry’s access to China through the use of bilateral and multilateral trade forums.

Thank you very much for the opportunity to testify.

APPENDIX I

PROMOTING FAIR AND TRANSPARENT REGULATION

DISCUSSION PAPER


I. Setting The Foundation for Open and Fair Securities Markets

Deep and liquid capital markets are the essential building blocks of today's economy, supplying the funds for economic growth and job creation. The firms that participate in the markets price risk, allocate capital, provide investors with advice and investment opportunities, and supply the liquidity needed to make markets work efficiently.

Just as capital markets underpin economic growth and job creation, transparent and fair regulatory systems are essential to the development of deep and liquid capital markets. A system of regulation that is transparent to market participants instills the confidence needed to attract both the suppliers and users of capital to make the best use of the markets.

Governments, regulators and the international financial institutions have undertaken substantial projects designed to improve the quality of the financial systems world-wide. Attention is now focused on building fair and transparent regulatory systems – grounded in the principles of market integrity and investor protection – to oversee those markets. Consistent with those goals and the principles of prudential regulation, discriminatory practices and considerations, such as the nationality of individuals or the place of origin of firms, should not be permitted to influence regulatory policies or actions.

This paper is based on the assumption that a country’s relevant laws should promote fair and transparent regulation. The principles outlined in this paper are not intended to prevent a regulator from taking measures for prudential or legitimate public policy reasons recognized under the World Trade Organization, including protecting investors, ensuring that markets are fair, efficient and transparent, and reducing systemic risk.

A consensus view, supporting the development of active, sound and efficient markets based upon established principles for capital market regulation, is rapidly emerging. In September 1998, the International Organization of Securities Commissions (IOSCO) issued a paper entitled “The Objectives and Principles of Securities Regulation” that urged the adoption by all regulators of processes and regulations that are:

• consistently applied;
• comprehensible;
• transparent to the public; and
• fair and equitable.

The International Monetary Fund (“IMF”) is developing a broad-based “Code on Good Practices and Transparency in Monetary and Financial Policies” that complements IOSCO’s work.

The securities industry, which today operates on a global basis, supports the IMF and IOSCO efforts to establish principles of fair and transparent regulation. The securities industry strongly believes that by making regulation and the operation of regulators accessible and transparent and by treating foreign and domestic licensed market participants fairly and equitably, governments, regulators and international financial institutions will promote the best markets for investors throughout the world.

Building on the emerging regulatory consensus, this paper provides the views of the securities industry on fundamental regulatory principles and practices that will provide a fair and level playing field for market participants. It also sets the foundation for building strong and vibrant markets worldwide. Moreover, we strongly believe that the principles promoting fair and transparent markets are broadly applicable to all financial services firms participating in the global capital markets. In this regard, we are actively seeking the support of financial services firms worldwide in promoting these principles.

II. Guiding Principles of Fair and Transparent Regulation

Rules, regulations and licensing requirements should be considered and imposed, and regulatory actions should be taken, only for the purpose of achieving legitimate public policy objectives that are expressly identified, including, for example, investor protection, maintaining fair, efficient, and transparent markets, and reducing systemic risk.

B. Regulation should be enforced in a fair and non-discriminatory manner.

Regulations and regulators⁹ should not discriminate among licensed market participants on the basis of the nationality or jurisdiction of establishment of the shareholders of a market participant or the jurisdiction of establishment of any entity that owns or controls the equity or indebtedness of a market participant.

The relationship between a regulator and a licensed market participant should be governed by the standards set forth in relevant rules and regulations, and should not be subject to political or other extraneous or improper considerations.

The introduction of new securities products and services by firms should be governed by the standards set forth in relevant rules and regulations

C. Regulations should be clear and understandable. Clear and understandable regulations and rulings provide market participants with the predictability and necessary knowledge to comply with regulations. Opaque or ambiguous regulations and rulings create uncertainty among investors and licensed market participants.

All regulations should be publicly available at all times. All regulations should be made, and at all times remain, publicly available, including requirements to obtain, renew or retain authorization to supply a service. Disciplinary actions should not be taken based on violations of regulatory standards that were not in effect at the time the relevant activity took place.

E. Regulators should issue and make available to the public final regulatory actions and the basis for those actions, in order to enhance public understanding thereof.

III. Rulemaking and Implementation

A. The rulemaking process

1. Regulators should utilize open and public processes for consultation with the public on proposals for new regulations and changes to existing regulations. A reasonable period for public comment should be provided. Any hearings at which formal promulgation or adoption of new regulations or changes to existing regulations are considered, if open to a member of the public, should be open to all members of the public. Regulators should not take arbitrary regulatory action against those who participate in the consultation process.

In considering whether rules, regulations, licensing requirements or actions are necessary or appropriate, regulators should also consider, in addition to the protection of investors, whether the action will promote efficiency, competition and capital formation.

B. Communicating and implementing new rules

1. New rules and regulations that provide advice for market participants should be made available to them and the public in a timely and efficient manner. Such changes should be made available, in writing, by electronic media or other means of distribution so that all market participants have reasonable access to such material.

2. Market participants should be given a reasonable period of time to implement new regulations. The effective date of a new regulation should provide a reasonable period for market participants to take the steps needed to implement the new regulation under the circumstances.

C. Interpretations of rules

1. Regulators should establish a mechanism to respond to inquiries on rules and regulations from market participants. The titles and official addresses of the relevant regulatory offices should be provided.

Interpretations and the grants or denials of regulatory relief or exemptions should be made available to the public. Such interpretations, relief or exemptions should generally apply or should be applied upon proper request, to substantially similar licensed market participants and new products. Under limited circumstances it may be appropriate to delay the publication of individual grants of relief for reasonable periods of time to address legitimate competitive concerns.

IV. Licensing and New Product Procedures

Procedures for licenses and introduction of new securities products and services.

Criteria governing licensing of firms and the introduction of new securities products and services by firms should be in writing and accessible, and should be the basis on which decisions are made. All regulations and related explanatory materials governing the consideration and issuance of licenses to firms and the introduction of new securities products and services by firms should be reduced to writing and made publicly available to potential applicants upon request. No licensee should be denied a license, and no new securities product or service should be prohibited, on the basis of any factor not identified in such written regulations or explanations.

The introduction of new securities products and services by firms should be governed by the standards set forth in relevant rules and regulations. Where particular requirements are established in connection with the introduction of a product or service, such requirements should govern the introduction of complying products and services. In order to promote flexibility and efficiency in the capital markets, such standards and requirements should enable firms, to the maximum possible degree consistent with principles of prudence and investor protection, to introduce complying new products and services on the basis of sound internal procedures for compliance without additional regulatory review.

3. Information supplied by applicants as part of an application process should be treated confidentially. Such information should be disclosed only in accordance with existing rules permitting public disclosures, such as those that may be triggered by the granting of a license or product approval.

4. Regulators should promptly review all applications by firms for licenses and required product or service approvals and should inform the applicant of any deficiencies. No application for a license or approval that provides all information required pursuant to regulation and is made in good faith by an applicant that meets required criteria should be refused review and action by the relevant regulator. Action on all applications received should be taken within a reasonable period. Licenses should enter into force immediately upon being granted, in accordance with the terms and conditions specified therein.

5. Where an examination is required for the licensing of an individual, regulators should schedule such examinations at reasonably frequent intervals. Examinations should be open to all eligible applicants, including foreign and foreign-qualified applicants.

6. Fees charged in connection with licenses and the introduction of new securities products and services should be fair and reasonable and not act to prohibit or otherwise unreasonably limit licensing requests or the introduction of new product and services.

B. Licensing of entities and their employees

1. An applicant's competence and ability to supply the service should be the criteria used for licensing entities and employees. The terms and conditions for granting licenses should be made explicit, including education, experience, examinations and ethics. Procedures and criteria should not unfairly distinguish between domestic and foreign applicants. In addition, there should be no quantitative limits on the number of licenses to be granted to a particular class of market participants who are otherwise qualified.

2. When imposing licensing requirements, regulators should endeavor to give consideration to comparable testing or other procedures confirming the qualifications of an applicant that already have been completed in another jurisdiction. The ability of qualified and experienced market professionals to provide services in a foreign jurisdiction may be promoted where testing or other procedures used in the professional’s home jurisdiction may satisfy all or part of the foreign jurisdiction’s licensing requirements.

C. Denials of licenses and product and service approvals

When denying an application for a license or a required securities product or service approval, regulators should, upon request, provide an explanation for that action. Any total or partial denial of any application for a license or a required new product or service approval should, upon request, be accompanied by a written statement of explanation from the relevant regulator detailing the reasons for the denial, including the particular requirements of the regulations governing the issuance of such license or required approval that were not satisfied. Applicants should be given the opportunity to resubmit applications or to file additional or supplementary materials in support of their applications.

2. Applicants should be afforded meaningful access to administrative or judicial appeal of a denial of a license or a required product or service approval (or failure to act on an application).

3. An appeal of a denial of a license or a required product or service approval should be decided within a reasonable time period after the appeal is filed. An applicant’s decision to pursue an appeal (whether formal or informal) should not prejudice its existing licensed operations.

Implementation of Regulatory Standards

A. Inspections, audits, investigations and regulatory enforcement proceedings¹⁰

1. All inspections, audits, investigations and regulatory enforcement proceedings should be conducted pursuant to established regulatory and judicial standards and should not arbitrarily discriminate based on improper or other extraneous criteria like nationality.

2. All inspections, audits, and investigations should be conducted in a manner that does not impinge on the rights of licensed market participants and their directors, officers and employees.

A regulatory authority¹¹ should not publicly disclose the fact that it is conducting an enforcement related inspection, audit or investigation of a particular entity until a determination has been made by the regulatory authority to take remedial or other enforcement-related action, unless otherwise subject to a legally enforceable demand unless made in connection with a generally applicable disclosure requirement imposed on the entity. The inspection, audit or investigation should be conducted at all times with due attention to the privacy and confidentiality concerns of all affected parties, including licensed market participants, their directors, officers, employees, and clients.

B. Regulatory proceedings to impose a sanction

1. Notice and opportunity to be heard

a. Notice of applicable law and regulation. A regulatory proceeding to impose a sanction should only be instituted based on the violation of laws or regulations that were in effect at the time that the relevant activity occurred and where the subject of the proceeding had timely notice of them.

b. Notice of determination to take action. Licensed market participants should be notified in a timely manner both when: 1) a determination has been made to hold a regulatory proceeding concerning the conduct of that participant; and 2) a decision in, or on the status of, that proceeding has been made.

c. Opportunity to be heard. Except in situations where emergency temporary relief is necessary, in all regulatory proceedings, licensed market participants should be given a reasonable opportunity to be heard and to submit, on the record, position papers and other documentary evidence.

2. Representation by counsel and access to evidence

a. Right to legal counsel. The subjects of a regulatory proceeding should have the right to have legal counsel of their choice represent them in all meetings with, and interviews by, regulatory authorities. A regulatory authority should not suggest or imply that the attendance of counsel will in any manner alter the character of the proceedings being conducted, the level of supervisory review to be undertaken, or the manner in which the regulatory authority carries out its functions.

b. Access to evidence. The subjects of a regulatory proceeding should, upon request, be permitted reasonable access to all documents and records that are relevant to the subject matter involved in the pending regulatory action. Documents and records to which access is denied based on privileges generally recognized in such proceedings should not be admissible in evidence in such regulatory proceeding.

c. Burden of proof. The burden of proof to demonstrate that a licensed market participant has not conducted its business in accordance with the relevant law and regulation should rest with the regulatory authorities.

3. Sanctions and Appeals

a. Sanctions. Sanctions by a regulatory authority should be imposed in a fair and nondiscriminatory manner based on the relevant facts and with an effort to treat similarly situated persons and entities in a similar manner. The basis for any decision to impose sanctions by a regulatory authority should be explained in a writing that is made available to the subjects of the proceeding.

b. Appeals. The subjects of a regulatory proceeding should have available to them a forum for appealing the decisions rendered and sanctions imposed. The body considering a particular level of appeal should be separate from that which made the decision or imposed the sanction that forms the basis of the appeal. Appeals to a regulatory authority should be decided in a timely manner and appeal determinations should be explained in a writing that is made available to the subjects of the proceeding.


For information and/or comments contact:

David Strongin, 212/618-0513 – dstrongin@sia.com

FOOTNOTES

1. SIA represents the shared interests of nearly 700 securities firms. SIA member-firms (including investment banks, broker-dealers and mutual fund companies) are active in all phases of corporate and public finance. The U.S. securities industry manages the accounts of nearly 80 million investors directly and indirectly through corporate, thrift, and pension plans. In 2000, the industry generated $314 billion of revenue directly in the U.S. economy. Securities firms employ over 700,000 individuals in the U.S.

2. The American Embassy In China, http://www.usembassy-china.org.cn/english/economics/

3. Financial Liberalization and Financing Constraints: Evidence From Panel Data on Emerging Economies, Luc Laeven, World Bank, October 2000, http://wbln0018.worldbank.org/html/FinancialSectorWeb.nsf/(attachmentweb)/wp002467/$FILE/wp002467.pdf

4. Governments often use economic needs tests to discourage new foreign direct investment, and take into account, inter alia, the number of existing firms, level of competition, and the size of the market as criteria in the process of granting a license to establish a commercial presence.

5. PriceWaterhouseCoopers, The Opacity Index, January 2001. Opacity is based on 5 different factors that impact capital markets: 1) corruption; 2) legal system; 3) government and macroeconomic and fiscal policies; 4) accounting standards and practices (including corporate governance and information release); and 5) regulatory regime.

6. The study uses Singapore as the benchmark, so that an increase in opacity from the Singaporean level to the Chinese level has the same negative effect on investment as raising the tax rate by 46 percent.

7. 2001 White Paper on American Business in China, February 3, 2001.

8. China Tackles Murky Local Regulations To Ensure Adherence With WTO Pledges, Peter Wonacott, November 27, 2001.

9. The term “regulator” is intended to cover all bodies that are authorized pursuant to law to play a role in the licensing and supervision of the activities of financial services firms, as well as the bodies that formulate rules, regulations and policies relating to such firms. Where the legislature or authorized regulator delegates its authority to a non-governmental entity such as a self-regulatory organization or trade association, the term is intended to encompass such an entity.

10. The term "regulatory enforcement proceedings" means administrative or judicial action authorized by the relevant regulatory authority and is intended to cover civil, administrative or criminal proceedings that involve a financial services firm and/or its employees based on their financial services activities.

11. The term “regulatory authority” is intended to cover all regulatory bodies involved in the inspection, auditing, investigation or prosecution of the activities of financial services firms. Depending on the system, the term may encompass criminal and judicial authorities as well as non-governmental entities such as self-regulatory organizations.